Boeing takes $4.9billion hit to compensate airlines over grounding of 737 MAX


Boeing has put aside $4.9 billion to pay compensation to airlines that have canceled thousands of flights since the 737 Max jet was grounded after two deadly accidents.

The Chicago-based company added that the grounding of the jets will see $5.6 billion cut from its revenue and pre-tax earnings in the April-through-June quarter – more than half of 2018’s entire profit.

However, Boeing’s calculations are based on an assumption that the 737 Max will return to the skies in the autumn.

The company is still attempting to fix flight-control software that appeared to play a role in crashes that killed 346 people off the coast of Indonesia and in Ethiopia. 

In March, regulators grounded the Boeing 737 Max and the company suspended deliveries of new jets. 

Despite putting aside $4.9 billion to cover compensation and other costs, the figure does not include any lawsuits that families of victims may file against Boeing. 

Boeing this week hired a victims-compensation expert to oversee a $50 million relief fund for families, which the company said was separate from the lawsuits. 

An autumn return for the 737 is earlier than some analysts expected and may have contributed to a rally in Boeing shares in after-hours trading. 

Boeing is scheduled to report its quarterly results next week.

The company also raised its estimate of Max production costs by $1.7 billion because output will be curtailed longer than expected.   

The $5.6 billion hit to pre-tax earnings is more than half of Boeing’s $10.5 billion profit for all of 2018.

‘The Max grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks,’ Chairman and CEO Dennis Muilenburg said in a statement.

CFRA Research analyst Jim Corridore said putting a figure on airline compensation and the potential return of the plane provided important clarity around the damage inflicted by the grounding.

‘We expected a large charge, and this is in the order of magnitude we were expecting,’ he said. ‘In general, we are happy to have some details.’

The plane’s return has been pushed back several times, most recently after Federal Aviation Administration pilots found a new flaw while testing Boeing software changes in a flight simulator.

That discovery prompted Boeing to say in late June that it expected to present its proposed fix to the FAA ‘in the September timeframe.’ 

It would likely take several more weeks for the FAA and other regulators to approve Boeing’s work, give pilots additional training, and bring long-parked jets up to flying condition.

Boeing says concessions to airlines will be spread over several years but it is taking the entire estimated expense as a charge in the second quarter. Boeing did not specify what form the compensation would take, but hinted that it would not be entirely in cash.

Despite the grounding, Boeing has kept building Max jets, although at a reduced rate of 42 per month, down from 52, since April. The company said Thursday that it assumed it can raise production gradually to 57 per month in 2020.

Boeing has delivered fewer than 400 Max planes but has unfilled orders for about 4,500.

Shares of Boeing Co. rose $7.54, or 2.1%, to $368.65 during after-hours trading. Before the announcement, they fell $8.41 to end regular trading at $361.11.


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