Boeing’s reputation at risk

Two of Boeing’s new-model 737 have crashed in a year and the aircraft-maker's stock has suffered badly. Can it recover? Matthew Partridge reports.


Boeing 737 Max: grounded in China and Europe
(Image credit: JOHN D PARKER 2018)

Two of Boeing's new-model 737 have crashed in a year and the aircraft maker's stock has suffered badly. Can it recover? Matthew Partridge reports.

Investors "have piled pressure on Boeing", says the Financial Times. The aircraft manufacturer's shares slumped by 13% early this week after a 737 Max 8 operated by Ethiopian Airlines crashed, killing all 157 people on board. Already regulators in Europe and China have ordered the immediate grounding of the Max 8 and 9 models, while the US is under pressure to follow suit. The Max has been Boeing's fastest-selling plane. Analysts predict that a grounding of the fleet and a temporary halt to deliveries could set Boeing back $5.1bn within two months.

Investors are right to be concerned, says Jeff Wise in Slate, especially since a Max 8 suffered a similar accident last autumn in Indonesia. The Max only made its debut two years ago. "Given that, for such a new type of aircraft to suffer two fatal crashes is extraordinarily unusual." While the immediate cause of the crashes may have been faulty software, Boeing's decision to use "automation to paper over the aircraft's flaws" (notably a tendency to pitch up) added to the complexity of the system, possibly overwhelming an "unprepared" pilot. Even if the 737 Max is allowed back in the air its future is "suddenly looking shaky". Boeing is going to have to come up with "a very convincing fix", or "start over with a fresh sheet of paper".

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Don't panic, says John Sindreu in the Wall Street Journal. "The lesson of history is that such accidents, however tragic, do surprisingly little damage to the business of selling aircraft". Regulators could demand an "expensive overhaul" of the entire line, especially if the problem is shown to be a design flaw rather than just a software glitch. But the 737 "is the best-selling commercial plane family in history", so airlines "are unlikely to turn away its latest iteration". They are also more forgiving than you'd think: aircraft models with a "calamitous safety record", such as the DC-10, have enjoyed long careers. Boeing has easily survived similar problems in the past, such as the grounding of the 787 for three months in 2013, say Tom Buerkle and Ed Cropley on Breaking Views. However, this time the rapid response from Chinese aviation authorities is particularly "worrisome". After all, "it's Boeing's single largest market. Any ban could provide an opening'" for a competitor, such as the state-owned Commercial Aircraft Corporation of China, which has ambitions to "upset the profitable duopoly Boeing and its European rival Airbus currently enjoy".

Time for total transparency

With regulators grounding two-thirds of 737 Max jets around the world, Boeing needs to demonstrate "total transparency" in an attempt to determine the cause of the problem and restore confidence, says David Fickling for Bloomberg. They should bear in mind the example of Johnson & Johnson, which withdrew all Tylenol-branded painkillers in 1982 after a criminal laced some packets with cyanide. By acting so quickly, J&J "won back the faith of customers and in the process launched a thousand crisis management textbooks."

Interserve: the next Carillion?

Over the past few years, outsourcing firm Interserve has been "laid low" by an "ill-judged acquisition spree, loss-making contracts and a disastrous foray into energy from waste plants", says Zoe Wood in The Guardian. Now the group, which builds schools and runs offender rehabilitation services for the government, is on its knees.

Shareholders have been told the company will "run out of money" if they do not back a debt-for-equity swap. The company's plan is to cut Interserve's £631m debt pile by three quarters in exchange for giving up 95% of the company to its lenders banks and hedge funds. However, with furious rebel shareholders, led by hedge fund Coltrane, backing an alternative plan that includes a rights issue and a 10% stake, the vote is set to "go down to the wire".

The company's deal is "pretty ugly" as it will "leave shareholders with heavily watered down positions", says Ben Marlow in The Daily Telegraph. However, the most likely scenario in the event of a rejection means "a pre-pack administration", where smaller creditors and shareholders would be "wiped out".

Time for the alternative plan is running out, agrees Alex Brummer in the Daily Mail. And Whitehall has "put so many eggs into the outsourcing basket" that the costs could be "enormous" if Interserve simply goes bust. Dealing with the fallout from Carillion, which went bankrupt a year ago, "has been a ghastly" and expensive experience. A debt deal or a prepared administration looks safer. "The lesson from Carillion is that public services are too important to be messed with."

City talk

Years ago, a Goldman Sachs executive who wore a seersucker suit was told to "go home right now, and change out of your pyjamas"; says Robert Armstrong in the Financial Times. That employee would now be having the last laugh with CEO David Solomon's announcement to staff that "formal business attire" is no longer required. Solomon insists this is "a societal change and not a Goldman Sachs change". However, it also reflects a transformation in Goldman Sachs itself away from investment banking, with the new consumer business leading to "an influx of software engineers and retail bankers".

After a "standoff" that began after Barrick Gold suddenly tried to take over Newmont Mining, the two have "buried the hatchet" by agreeing a joint venture in Nevada, says George Hay on Breaking Views. By meshing their two adjacent mines together the miners aim to save $5bn. Barrick will make less from this venture than originally planned, but it gets sole control, precluding bureaucratic squabbling. And it avoids "the execution risk of a full merger". In sum, the group's "impetuousness" has paid off.

The size of Nvidia's $6.9bn acquisition of Mellanox Technologies "raises some eyebrows", says Dan Gallagher in The Wall Street Journal. The company, which makes computer graphics processors, "has never done a deal near this scale before" . Still, at least it is doing this "from a position of strength": the chip maker "has been on fire over the past few years". What's more, Mellanox is "highly profitable" and could add much to Nvidia's data-centre segment. Nvidia also has more than enough cash on hand to complete the deal. No wonder the shares jumped by 7% on the news.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri