Why Boeing Stock’s Downward Spiral May Get Worse Before Getting Better

Shares of the Boeing Co. (BA) are in a free fall this week as the defense company and jet maker reels from a devastating crisis over its newest commercial plane model. The company’s massive loss in market value has even dragged down the Dow Jones Industrial Average, of which Boeing is one of the largest constituents with a 10.6% weight.

The recent decline is even more troubling when investors consider how the company has outperformed the broader market since late last year. While the Dow Jones fell 8.7% in December, Boeing stock only lost 7% that month. Since the Dec. 24 bottom, BA is up 28% as of Tuesday’s close, while the Dow Jones is up only 17.3%. This raises concerns over if the firm can weather the current storm and begin to outperform its parent index again.

Here’s why investors have dragged BA stock down by double-digit percentage points this week – and what they should expect in terms of crisis recovery moving forward…

The News

On Sunday, March 10, Ethiopian Airlines Flight 302 – meant to travel from the nation’s capital of Addis Ababa to Nairobi, Kenya – lost contact shortly after takeoff and crashed just southeast of Addis Ababa in the town of Bishoftu. All 157 people on board the flight were killed in the crash, making it one of the worst aviation accidents in Ethiopian history. 

While Sunday’s tragedy alone would’ve likely been enough to drag down the stock, the fact that the Ethiopian crash marks the second deadly crash involving Boeing’s bestselling 737 MAX 8 jet in less than six months poses enormous safety questions regarding the model. The first happened last October when Lion Air Flight 610 left Indonesia’s Soekarno-Hatta International Airport and crashed into the Java Sea about 12 minutes after takeoff, killing all 189 passengers and crew aboard the aircraft.

Investigators believe the cause of both crashes is a MAX 8 feature in which the plane’s nose automatically pushes downward when the system detects that it’s pointed too high. Now, airlines across several countries, including Indonesia, Ethiopia, China, and even the EU, are ceasing use of any MAX 8 models out of fear of repeat accidents.

Boeing issued a statement after Sunday’s crash, saying it gives its “heartfelt sympathies to the families and loved ones of the passengers and crew on board” and has its technical team at the crash site to aid in the investigation.

How Investors Reacted

Wall Street became spooked at the thought of the model’s fatal engineering, selling shares of Boeing stock in frenzy this week. BA stock fell more than 6% to $375.41 on Tuesday for a decline of 11.15% since last Friday’s close of $422.54. Not only was Tuesday’s settlement the lowest in over a month, but it also marked the company’s biggest two-day loss since June 2009. The stock is now up only 16.4% in 2019 from the Dec. 31 close of $322.50.

The Bigger Picture

The devastating emotional impact of the crashes notwithstanding, arguably the most devastating business impact for Boeing remains the number of MAX 8 planes it’s already sold around the world. Analysts and market participants alike wonder just how much the model’s harrowing safety concerns could influence Boeing’s earnings over the next few years.

With the 737 MAX being the fastest-selling plane in the company’s 102-year history, Boeing execs widely touted their high long-term hopes for the model. In January, CFO Gregory Smith said the 737 MAX should make up “approximately 90 percent” of all 2019 deliveries. His conjecture seemed largely on course; the firm has received over 5,000 orders for the model from more than 100 customers around the world. They make up the biggest slice of the firm’s nearly 5,900-plane backlog. Not to mention the model carries a hefty price tag between $100 million and $135 million, depending on the discounts Boeing routinely gives prized airline customers.

While it’s unfair to generalize all 737 MAX models as unsafe as the newest MAX 8 model, federal regulators are undoubtedly set to scrutinize the entire fleet in the wake of such massive losses of life. They’ll be even more hard-pressed to go after the airlines making the biggest purchases that have so far refused to ground their 737 MAX planes from further use, which could affect the overall airline industry’s profitability moving forward. Southwest Airlines Co. (LUV), for instance, bought 280 of them through January and, as of Tuesday, remains one of the few major airliners keeping them in use. Shares of LUV tumbled about 2.3% in Tuesday’s session from $51.61 per share to $50.40.

Looking Ahead

The most formidable – and consistently bullish – jet maker in the world faces one of its worst crises in years. While plane crashes unfortunately occur with some regularity around the world, most never result in the high casualties the two MAX 8 crashes saw on Sunday and back in October.

With the Indonesia crash’s ongoing investigation now snowballing into this new investigation, Boeing stock likely has more hard times ahead of it as more details come out. Investors may want to average down their positions if the stock keeps falling in the short term. However, new investors should remain cautious when considering buying shares of the firm.