Boeing's 737 Max debacle could be the most expensive corporate blunder ever
New York(CNN Business) The 20-month grounding of the 737 Max could end as soon as this week, but Boeing's mounting costs have soared to tens of billions of dollars. That means the plane maker's repeated safety oversights and mismanagement were not only tragic but also rank among the expensive corporate mistakes in history.
The two fatal crashes that led to the grounding of the Boeing 737 Max killed 346 people.
Financially, Boeing continues to pay a hefty cost to ensure the safety of future 737 Max passengers.
Direct costs
Boeing has detailed about $20 billion in direct costs from the grounding: $8.6 billion in compensation to customers for having their planes grounded, $5 billion for unusual costs of production, and $6.3 billion for increased costs of the 737 Max program.
The company also spent nearly $600 million for jet storage, pilot training and software updates that are not included in the company's overall cost estimate. It also established a $100 million victim compensation fund, which is also not included in Boeing's $20 billion in estimated costs.
So the costs of the grounding released by Boeing total $20.7 billion.
Boeing's legal liability will almost certainly add to that cost. Published reports show that the families of the first 11 victims to settle with Boeing received at least $1.2 million each. That means the total cost is likely to top $500 million.
Interest costs are adding up, too. Boeing borrowed billions of dollars at a roughly 5% interest rate to keep building 737 Max planes it can't deliver. The company built 450 Max jets during the grounding, but it hasn't delivered a single 737 Max plane in that nearly nearly two-year period.
Only about half will be delivered next year, and some deliveries will stretch as far as 2023. Boeing doesn't get most of the money from a sale until the plane is delivered to the airline, so the interest will pile up — perhaps by about $3 billion or $4 billion, said Chris Denicolo, aerospace credit analyst with Standard & Poor's.
What's clear is that the $20.7 billion in costs that Boeing has detailed is only the starting point. Bank of America puts the costs at more than $25 billion.
"It's going to be more than $20 billion. But it's hard to say how much more it's going to be," said Denicolo.
Lost sales
If financial damage from the 737 Max remains in the $20 billion range, that would not put it in the running for the most expensive mistake by a company. Volkswagen has spent €32 billion, or $38 billion, on its emissions cheating scandal. The most expensive mistake to date is the $68 billion cost to BP of the Deepwater Horizon explosion and oil spill of 2010.
But BP lost little or no sales because of Deepwater Horizon, and VW suffered only a minor, short-term loss of sales from the emissions scandal. By contrast, it's clear that Boeing has suffered a huge loss in sales in the wake of the 737 Max grounding.
Because of the grounding, Boeing lost the cancellation fees that had been written into in its sales contracts for 737 Max orders. As the Covid-19 pandemic sent air travel demand plummeting, airlines have begun taking advantage of the free cancellation policy, anticipating they won't need new planes for several years.
Boeing had disclosed 448 canceled orders for the Max so far this year, compared with only nine for its other models. In addition it has dropped another 782 orders from its backlog of 737 Max orders because it believes those orders are no longer certain enough to rely on. In at least some cases those uncertain plane orders are jets airline customers have said they no longer want.
A 737 Max typically sells for about $55 million, or half of the stated list price, so the worst-case scenario for Boeing is that it could lose as much as $67 billion in revenue from the drop in sales.
But experts say it's more likely that Boeing will eventually sell those planes, though at a steep discount, in some cases to the same customers who are now canceling the orders.
S&P's Denicolo and another industry expert agree that those steep discounts in sales price, which wouldn't have taken place if not for the grounding, are the real financial risk for Boeing.
"Say you're an airline. If there's no longer any penalty, why not cancel all my orders, and I can buy them back much cheaper?" said the industry expert, who spoke on the condition of anonymity.
Boeing will not comment on the prices paid for its planes or any discounts. But the expert said it might be as much as a $20 million discount per plane, or roughly $25 billion total — more than doubling the true cost of the grounding.
Discounting many of the 3,300 other Max orders still on the books could make Boeing's total cost of its 737 Max debacle climb even higher, perhaps past the $68 billion price tag of Deepwater Horizon.
