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Morningstar | Boeing Rolls Out MCAS Fix but Certification Not a Done Deal Yet

Several headlines emerged around Boeing’s 737 MAX on March 27. The head of the Federal Aviation Administration along with other U.S. government officials testified to Congress. At the same time, Boeing introduced a fix to the MCAS software that contributed to the Lion Air crash and may have brought down Ethiopian Airlines flight 302. Based on what we heard, we’re changing our estimate for how long the MAX groundings will last to around two months from three months.

Since the duration of the groundings remains a key factor in determining the impact on Boeing, we plan to trim the $2 billion contingency we placed in our valuation model following the MAX grounding by $500 million. However, we anticipate a negligible impact to our fair value estimate, which stands at $334. We maintain our 2019 forecast for Boeing, since negotiations between Boeing and many airlines may not conclude this year and some compensation may be paid out via future aircraft discounts. Initial findings from the Ethiopian Airlines investigation is the next piece of information that could impact our valuation.

The MCAS fix proposed by Boeing limits MCAS' control over the plane and alerts pilots to issues with sensors that feed MCAS. We’ve revised our base-case timeline for the groundings to around two months because this MCAS fix appears mature, the MCAS upgrade should only take one hour per plane, and the updates will not require significant training. However, the FAA will need to certify MCAS and--in a departure from usual practice where other authorities simply follow the FAA’s lead--foreign countries will review and test the system before certifying. We think the FAA may want to wait until other aviation authorities are prepared to certify before doing so itself. Our two-month estimate for the groundings assumes that these certifications move forward expeditiously, a new type certificate isn't required for the MAX, and the training Boeing has outlined is agreed to by aviation authorities.

The Department of Transportation’s inspector general office will also audit the FAA’s process to certify aircraft with a specific focus on the MAX aircraft, and we think it will wrap up its work in 10 to 12 months. The FAA also appears to be independently reviewing the Organization Designation Authorization process, which outsources some certification work to aerospace companies like Boeing. Following these audits and reviews, we think it’s possible that the certification process may become more complex and lengthier. The time between first flight and certification has already increased to an average of around two years for newer models such as the 787, A350, and A380 compared with one year for aircraft that entered service in the 1980s and 1990s. If the time required for certification increases, we think this could potentially endanger the 2025 entry into service Boeing has floated for its potential next generation midsize aircraft that hasn’t been launched yet.