Reinsurance News

Boeing faces $4.9bn in costs due to 737 fleet suspension

19th July 2019 - Author: Matt Sheehan

Boeing has announced that it will record an estimated $4.9 billion charge to cover costs related to the worldwide suspension of its 737 MAX fleet.

boeing-737-aircraftThe fleet was grounded following the Ethiopian Airlines crash in March, which experts believe was caused by a fault in the aircraft’s automated anti-stall system.

Boeing said the charge was related to potential concessions and other consideration to customers for disruption related to the suspension, and will result in a $5.6 billion hit to revenue and pre-tax earnings in its second quarter results.

The aircraft manufacturer continues to work with civil aviation authorities and currently anticipates that the 737 fleet will be returned to service in the fourth quarter of 2019.

It remains unclear how much of the overall loss will be transferred to Boeing’s re/insurance program, although Willis Re has suggested that the incident has the potential to become the largest ever non-war claim incurred by the aviation reinsurance market.

Analysts at Deutsche Bank also stated that the losses are likely to be a “major event” for the industry.

Currently, reinsurers Munich ReSwiss Re, Hannover Re and GIC Re have been confirmed as facing potential exposure to the crash, with initial loss estimates ranging between €10 million for Hannover Re and up to €120 million for Munich Re.

Chubb and Willis Towers Watson have been confirmed as the lead insurer and broker for Ethiopian Airlines, respectively, while Global Aerospace is the lead insurer for Boeing alongside broker Marsh.

Boeing faced dozens of lawsuits resulting from the Lion Air crash in Indonesia last October, which also resulted in the deaths of all 189 passengers and crew on board.

In both cases, the planes showed similar flight patterns before crashing, and investigators believe that an anti-stall system on the Boeing 737 Max model may have forced the nose of the aircraft to lower erroneously.

“We remain focused on safely returning the 737 MAX to service,” said Boeing Chairman, President and CEO Dennis Muilenburg. “This is a defining moment for Boeing. Nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes.”

“The MAX grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks,” he explained.

Greg Smith, Boeing’s Chief Financial Officer and Executive Vice President of Enterprise Performance and Strategy, also commented: “We are taking appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges.”

“Our multi-year efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment.”

While the $4.9 billion charge will be recognised in Q2, Boeing expects any potential concessions or other considerations to be provided over a number of years and take various forms of economic value.

Additionally, Boeing’s estimated costs to produce the aircraft in the 737 accounting quantity increased by $1.7 billion Q2, primarily due to higher costs associated with a longer than expected reduction in the production rate.

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