Fitch Rtgs: Boeing 737 MAX Issue Could Have Broad Aviation Credit Effects
Fitch Ratings-Chicago-13 March 2019: The Boeing 737 MAX could be a concern throughout the aviation credit sector for much of 2019, according to Fitch Ratings. It is premature to take credit ratings actions at this time, as final conclusions about the Ethiopian Airlines and Lion Air crashes are not yet known, and there are many scenarios that could play out. Most concerning would be a harsh scenario including a systemic issue with the aircraft leading to lengthy groundings, material delivery delays, significant order cancelations and negative public sentiment toward the MAX.
A harsh scenario such as this could weaken the credit profiles of Boeing (A/Stable) and some of its suppliers and place significant pressure on some weaker airline issuers. The effect on aircraft-secured debt transactions would likely be mixed, with deals containing the MAX potentially coming under pressure, offset by higher valuations for alternate narrow-body models needed to replace the MAX. We do not expect the MAX will have a material effect on aircraft lessors rated by Fitch.
While Fitch is not taking any rating actions at this time, we are watching for several key items in the near term. A key data point will be the initial findings of the Ethiopian crash investigation. If there is a correlation between the causes of the two recent crashes, we expect the situation to worsen, and lengthy groundings and delivery delays to ensue. Similarities between the Lion Air and Ethiopian Airlines accidents would possibly indicate the presence of a design flaw that would need to be addressed. We would monitor the amount of time and resources needed to address such an issue. The focus would first be on the existing fleet and then the production process. We will also watch for the effects on the flying public's sentiment toward the MAX. In addition, we would assess the ability of airlines to obtain replacement capacity for the MAX and how significant delivery delays would affect business plans.
Boeing's credit profile is not immediately affected by the two crashes because of the company's substantial liquidity, financial flexibility, low leverage, market positions and revenue diversification. Groundings and delivery delays would likely need to last beyond several months for the company's rating to be affected, although Fitch could revise the rating outlook or place it on Rating Watch sooner. Legal liability for the crashes and compensation for replacement capacity are additional watch items. Reputational damage could also be substantial, although Boeing has weathered previous crash episodes.
If the situation persists, we expect Boeing would adjust or eliminate share repurchases and reevaluate its planned increase of 737 production rates to 57/month. If a significant fix is needed, it could drain resources from the proposed New Mid-Market Airplane. The situation could also put more attention on the certification of the 777X. While the MAX makes up a small percentage of the global airplane fleet, it is a key part of many airlines' growth and cost reduction plans. The plane was first delivered in mid-2017 and 376 aircraft were delivered through February 2019. The MAX is a key program for Boeing, with approximately 90% of 2019 estimated 737 program deliveries coming from the MAX. Fitch estimates 2019 MAX deliveries at around 590 aircraft are worth $27 billion-$30 billion of revenue.