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Boeing under pressure as FAA holds fire

The performance of Boeing’s share price in the past few years has been nothing short of majestic, with really strong gains since President Trump was elected in November 2016, with the shares up over 150%.

In is most recent earnings update the company reported more than $100bn in annual revenue for the first time, while also adopting a strong forecast for 2019 with earnings of up to $20 a share.

Its commercial airplanes business delivered a record 806 aircraft last year with an expectation that 2019 would be even better, with up to 900 aircraft expected to be delivered, with China expected to be a key market, while the defence division also showed some decent growth with a significant number of contracts won from the Pentagon, including $13.7bn worth of wins at the end of Q3 alone.

Recent events with respect to the two crashes of the 737 MAX 8 models could well blow a large hole in those forecasts, however the damage thus far has been fairly limited, with the shares only down 15% from their recent all-time highs.

The decision by the various aviation authorities of China, Australia, Singapore, the UK and a number of EU aviation authorities speaks to a haemorrhaging of confidence in the safety of the aircraft which makes it all the more puzzling that the Federal Aviation Authority (FAA) is digging its heels in by saying it has full confidence in the safety of the aircraft, raising the prospect that politics could be playing a part.

It still remains unclear as to why the two aircraft crashed in the way that they did, but it does remain puzzling that the FAA should be so dogmatic, when a respected body like the UK’s Civil Aviation Authority, bans the overflight of all 737 MAX 8 models over UK airspace, due to concerns over safety.

Some US lawmakers are already expressing disquiet over the FAA’s stubbornness, which to some extent is moot given that it is pretty much banned from flying anywhere in Europe and Asia, as things stand now, but nonetheless the reluctance of the FAA to act does raise questions as to why it insists on standing apart from its peers in the rest of the world.

With the sale of 737 MAX 8’s a key component in the company’s growth prospects for 2019, and expected to contribute up to 30% of the company’s profits, the ongoing lack of confidence in the aircraft, as countries line up to ground the aircraft, is likely to see that percentage significantly reduced.

If the uncertainty turns into cancelled orders Boeing’s problems could well go from bad to worse, in the event the cause of the crashes is not identified and resolved quickly. As things stand Airbus shares have risen sharply on the back of Boeing’s woes with the shares at record highs, and up over 3% since last Friday, in anticipation of more orders for their A320 model.

Passengers are already expressing concern about getting on these 737 planes and if that translates into them transferring to airlines that don’t use these aircraft, then concerns about cancelled orders could increase further, and see further share price losses, towards $300, and the lows last year.

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