Question

Discussion Board: BOEING FINANCIAL IMPACT AFTER TWO FATAL CRASHES OF THE 737 MAX 8

Within a five-month time span two Boeing 737 MAX 8 airliners crashed killing 346 people aboard Lion Air Flight 610 on October 29, 2018, and the Ethiopian Airlines Flight 302 on March 10, 2019. Following the 2^nd crash, most airlines and world government regulators grounded the aircraft. The U.S. FAA first defended the airworthiness of the Boeing 737 MAX 8, but two days later reversed its decision.

As a financial analyst for the Boeing Corporation, please research the financial impact of this incident will have on our profitability and stock price.

In your financial notes, please address the following questions:

• Who are the stakeholders, and what are the ethical and financial issues arising in this situation?
• What assumptions or principles of accounting are relevant to the Boeing 737 MAX 8 case?
• Do you think it is ethical or financially sound strategy to try to time or delay the release of facts in order to diminish its effect on the Boeing’s stock price?
• What was Boeing's stock price on March 11, 2019, and what is it today?
• What would you have done differently than Boeing's CEO Dennis Muilenburg stance in defense of the airworthiness of the aircraft?
• Boeing maintains that the aircraft is safe and pilot error was the cause of the fatal crashes. However, does Boeing have the obligation to be transparent and reveal issues with the MAX 8 to the public? What implication does making these issues public have for investors who follow Boeing's stock price?
• Once the Boeing 373 MAX 8 issues are resolved, what will it have on the overall financial impact on the company’s profits, future sales of the MAX 8, stock price, and corporate reputation.

Answer 1

Q1) Who are the stakeholders, and what are the ethical and financial issues arising in this situation?

Answer: The stakeholders are i) Employees, ii) Stockholders, iii) Vendors, iv) Customers of Boeing, v) Banks

The financial issues arising out of the situation are

i) There will be panic in the markets, which will lead to crash in stock prices, thus damaging stockholders

ii) A large portion of the fleet will now have to be grounded and those airlines profitabiity will be impacted

iii) Financial stress might build up for the aircraft operator and they might default on the bank loan

iv) Settlement packages to the people who have died due to the crash

Ethical issues: Firing/ Termination of employees, Investigation into who is to blame for these disasters, tragic loss of life

Q2) What assumptions or principles of accounting are relevant to the Boeing 737 MAX 8 case?

Boeing uses "Program accounting" as a way to spread out the development cost (billions of dollars over multiple years).

This method reduces the cost per plane during the early stages of a project, smoothing profit margins over time.

It is a method which is under GAAP

Q3) Do you think it is ethical or financially sound strategy to try to time or delay the release of facts in order to diminish its effect on the Boeing’s stock price?

It is neither ethical nor financially sound to delay the release of the facts for the following reasons

i) It is illegal as the SEC mandates require companies to disclose information as soon as they can

ii) If information is withheld by the management, the investors will lose their trust in the management, which could lead to a massive sell off in the stock, thus hurting Boeing's stock price.

Q4) What was Boeing's stock price on March 11, 2019, and what is it today?

Opening price on March 11, 2019 was $222.99, while today (7th Oct, 2020), it is trading at $159.54, which is a drop of 28%

Q5) What would you have done differently than Boeing's CEO Dennis Muilenburg stance in defense of the airworthiness of the aircraft?

As CEO, your principal responsibility is to do right by all the stakeholders. I would have done the following things

i) Report the incident, as soon as it happened

ii) Carry out an internal investigation

iii) Collaborate with external investigation agencies

iv) Halt production of further such faulty aircrafts

Q6) Boeing maintains that the aircraft is safe and pilot error was the cause of the fatal crashes. However, does Boeing have the obligation to be transparent and reveal issues with the MAX 8 to the public?

It is the fiduciary responsibility of boeing to the stockholders and general public to maintain absolute transparency and reveal the actual issues which have caused the crash. This should be done so that the belief in the management remains, and if this is not done, it would be a blunder in corporate governance

Q7) What implication does making these issues public have for investors who follow Boeing's stock price?

The stock price of Boeing is likely to crash post the issue, but atleast fundamental investors will appreciate the fact that the mangement is transparent, and if the fundamentals improve, long term value could be created

Q8) Once the Boeing 373 MAX 8 issues are resolved, what will it have on the overall financial impact on the company’s profits, future sales of the MAX 8, stock price, and corporate reputation.

The sentiment around the Boeing 373 Max 8 will be very cautious, even after the issues are resolved as there was an unprecedented loss of life.

It is likely to cause financial stress on the companies profits, as new orders and future sales for that particular model of aircraft will be hard to come by, and the R&D cost would have to be written off and taken a hit as a loss, which will put pressure on the stock price.

Corporate reputation will be damaged for sure, as they were not very transparent with the disclousres of the actual issues and only time will tell how the reputation plays out for the management of Boeing