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Morningstar | Boeing Suffers Second MAX Cancellation, but We Remain Confident in Plane's Return to Service

We’re maintaining our $335 fair value estimate for wide-moat Boeing after Saudia’s low-cost subsidiary, Flyadeal, canceled its 737 MAX order for 50 aircraft (30 committed orders and 20 optional). The budget carrier was set to become an all-Boeing operator after it struck a deal to replace its Airbus aircraft in late 2018. Instead, its cancellation will erase $5.9 billion from Boeing’s order backlog and Flyadeal will expand its current fleet of A320neos. After Indonesia’s national carrier canceled its order of 50 aircraft last year, Flyadeal now becomes the second airline to withdraw its purchase agreement, removing approximately 50 aircraft from Boeing’s backlog of over 4,600 single-aisle orders. We don’t expect other carriers will follow Flyadeal’s lead, if Boeing can contain MAX issues to the MCAS software and communicate service re-entry through the end of the year. We maintain our six-month time frame for the MAX’s return to service, which implies the grounding will be lifted in September.

We remain confident in the 737 MAX’s return to service, especially after International Airlines Group signed a memorandum of understanding for 200 aircraft during the Paris Air Show. We believe the deal signifies airlines’ confidence in Boeing’s narrow-body platform and the limitations of Airbus’ production capacity in the coming years; new slots are mostly available only after 2025. While Flyadeal’s withdrawal is a bit concerning, we would seriously revisit our delivery forecast if a flagship customer like Southwest or Ryanair flipped to Airbus’ A320neo or A220 platform.

Amid the Federal Aviation Administration identifying new potential risks in simulator training, EASA reporting autopilot fixes, and carriers like Southwest extending schedule adjustments into October, we are maintaining our six-month grounding time frame. Even if the FAA’s test flights don’t commence until mid-July, the two- to three-week review period and subsequent decision should fall in September.

The MAX’s return to service was set back by an issue spotted in flight simulator testing. Consequently, the FAA flight certification tests scheduled for June are now expected to happen by July 8 at the earliest. Only after completing its FAA certification test flights can Boeing complete its final MCAS package and submit it for final review to the FAA. This process should take about a week. We estimate the FAA’s final review process, in coordination with EASA and Canada’s regulatory authority, will take close to three weeks. Assuming Boeing can submit its final package by the beginning of August, the formal service re-entry decision should arrive by the end of September.