General Electric (NYSE: GE) and The Boeing Company (NYSE: BA)have a lot in common. Their future is intrinsically linked by their common interest in aviation because General Electric engines and systems are used in many Boeing aircraft. Both companies also suffered from two recent Boeing 737 MAX crashes. Let's take a look at the highlights of recent events to determine what action might be worth buying – or avoiding – as a result.
Short term impact
There is no point in avoiding the elephant in the room: recent tragedies will definitely have an impact on both companies, even if it's hard to know exactly what it will be in the short term or, more importantly, in the long run.
In addition to the potential legal obligations that Boeing may have to pay, the grounding of the Boeing 737 MAX and the resulting reduction in production has increased from 52 aircraft per month to 42 aircraft per month (as of mid-April); which will hurt Boeing's profitability – not least because its margin expansion is partly dependent on volume growth.
Of course, this will also have an impact on General Electric because it has created a joint venture with Saffroncalled CFM International, which manufactures LEAP engines for the 737 MAX. In the case of GE, the short-term impact is rather difficult to assess for two reasons.
First, CFM is catching up on LEAP production. A slowdown in the production of 737 MAX could therefore mitigate certain production tensions. For example, in the last earnings call, GE's chief financial officer, Jamie Miller, said, "We still have about four weeks late in deliveries, but the company should be back on schedule mid-2019 ". In addition, the delays are thought to relate to the LEAP-1B for the Boeing 737 MAX, rather than the LEAP-1A, which is used for the Airbus A320neo family.
Second, the production of LEAP engines has a negative impact on GE Aviation's margin. Therefore, producing less could result in increased profitability in the short term. ]Let's be clear, however, the LEAP engine will generate significant profits and cash flow from after-sales / service sales, and the last thing GE wants to do is slow down LEAP production.
Both companies will see a short-term impact of the recent events, which will certainly be negative in the case of Boeing. But what about long-term impacts?
The glass half full
In the positive scenario, Boeing successfully delivers a software update to its Maneuvering Characteristic Augmentation System (MCAS) to add additional layers of protection if the angle of attack sensors (AOA) provide incorrect information.
For reference, AOA sensors look like wind vanes and measure the difference between the line of a wing string and the direction of the air passage. With an elevated level, the plane can stall, so MCAS (a computer-controlled system on the 737 MAX) automatically pushes the nose down. Unfortunately, it appears that incorrect information provided by an AOA sensor triggered the MCAS and that the pilots of Lion Air and Ethiopian Airlines could not prevent the crash.
In the light of an optimistic result, the 737 MAX will fly again in the coming weeks. In the meantime, confidence could be restored, just as consumers had regained confidence in Airbus after encountering a similar problem with erroneous information provided by an AOA sensor in 2014 – at that time the pilots were able to save the plane by disengaging a sensor.
The half empty glass
The pessimistic perspective suggests that the problem may become a more fundamental problem for the Boeing 737 MAX – which could hurt Boeing and General Electric.
In reviewing the two preliminary reports on the separate accidents, it is clear that in both cases an AOA sensor gave erroneous information. Indeed, the summary of the Ethiopian government's report states that "after take-off, the value recorded by the attack angle sensor became erroneous".
It is a very rare event, but not unheard of. This had already happened before with two Airbus planes, which caused a crash near Perpignan in 2008. and an incident near Bilbao in 2014. In both cases, two AOA sensors in the aircraft gave erroneous readings, which would be caused by the freezing of aircraft while the aircraft climbed to temperatures below zero. .
The problems of the Boeing 737 MAX are, at this stage, much more difficult to understand. Is it a mechanical problem with the AOA sensor or a software problem? Is it a combination of the design of the 737 MAX and the actions of the ground crew that damaged the AOA sensor? Is it a mere coincidence that two 737 MAX systems received incorrect data from AOA sensors within six months?
What can investors do?
Conservative investors will likely avoid both actions until a clear cause of the AOA data failures is identified. After all, even if the 737 MAX goes into service quickly, a failure of the AOA could recur in a few months. The software update will help prevent a crash, but the problem if the AOA data is not resolved remains very worrying.
According to a more optimistic view, the software update is enough to restore confidence in the 737 MAX and she is confident that the problem of AOA data failure will be identified. After all, Airbus has not suffered much from its publication in 2014. This incident has been solved. Boeing probably has more upside potential, so if you are inclined to believe in the positive scenario, then Boeing is the best buy.