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Boeing 737 Max - Impact Of Grounding: Suppliers and Global Airlines
A negative scenario in the airline industry could weaken the credit profiles of Boeing's suppliers. Global airlines' credit profiles may also be affected as many of them finance new aircraft through enhanced equipment trust certificates (EETC). More information related to this topic is provided below.

BOEING 737 MAX IMPACT ON CREDIT PROFILES
OVERVIEW

• Fitch Ratings, a credit rating agency, said that the crisis caused by the grounding of the Boeing 737 Max "could be a concern throughout the aviation credit sector for much of 2019".
• A scenario that includes "lengthy groundings, material delivery delays, significant order cancellations, and negative public sentiment toward the Max" could debilitate the credit profiles of Boeing (A/Stable) and its suppliers.
• Boeing's credit profile would not be immediately affected because of its "substantial liquidity, financial flexibility, low leverage, market positions, and revenue diversification".
• Credit market participants contemplate the possibility of the discovery of a systemic issue with the aircraft, which could result in their being grounded for a long time. This would cause material delays in the delivery of aircraft on order and major order cancellations.

GLOBAL AIRLINES

• There may be an impact on Boeing customers' credit, as many "finance new aircraft like the 737 MAX using enhanced equipment trust certificates" (EETCs). There are a total of 37,737 MAX aircraft, 34 of which have been delivered, according to Deutsche Bank, in five EETC issues.
• United Airlines recently priced $1.01 billion in equipment notes that finance the delivery of 25 planes, including nine Boeing 737 MAX planes, which represent 28% of the total value of the portfolio. 
• Other EETCs have an exposure of 58% for a $301 million transaction completed by Air Canada that is secured by one new Boeing 787-9 and four Boeing 737 MAX 8. According to Deutsche Bank, EETC investors are well protected from the impact of the grounding of these planes.

OTHER FINDINGS
SUPPLIERS

• Shares of Spirit AeroSystems are only down 9%, even though the company is responsible for approximately 70% of the 737's structure, as well as many engine components and wing parts. The aircraft accounts for nearly half of Spirit's annual sales.
• Despite the crisis, Spirit reported a first-quarter revenue of $2 billion in 2019. The company has stated that it will maintain its 737 deliveries to Boeing at the present rate of 52 shipsets per month. Spirit is storing extra production at its facilities and paying for the storage. 
• Spirit is one of the suppliers to still be producing at the old rate, while others have dropped to 42 a month.
• Safran, which produces engines for the Max alongside General Electric, states that it "continues to catch up on earlier production delays and so has not yet been affected by the decline in output". But if the grounding continues, the company would expect a €200million hit in the second quarter of 2019.
• Woodward, another supplier, states that its production has not been affected by the slowdown, but the company "has no contractual deal with Boeing that guarantees any particular rate".
• According to Darius Adamczyk, Honeywell's CEO, the company (which is a Boeing 737 supplier) hasn't seen an impact on its business from the Boeing 737 Max 8's grounding.

AIRLINES
Because of the Max grounding, Southwest Airlines "is facing a larger aircraft shortage", while Air Canada suspended its financial forecast for the first quarter and full year because of the grounding.
 United Continental is not yet experiencing a significant operational or financial effect from the grounding, but it has cautioned that the impact may worsen if the Max ban stretched into the summer travel season.

 Ryanair Holdings
 could be the very much affected by the grounding because it has a large number of these planes in operation and scheduled for delivery in 2019.
The grounding affects around 1% of Norwegian Air’s overall seat capacity.

Air China and China Southern

•  probably won't see a material impact to profits or growth plans because the aircraft accounts for 2.7% of combined air fleets in China. Capacity growth by Indian carriers Spicejet, Jet Airways, and Vietnam’s VietJet, is at risk of being delayed on the suspension of Max deliveries.
• American Airlines is extending cancellations for the MAX through December 3, 2019. The airline became the first US airline to drop a route entirely as a result of the grounding.
• According to a report, China Southern is the largest carrier impacted by the grounding, with a loss of around 3.8 million seats, while American Airlines have lost nearly 2 million seats. This report calculates the airline industry’s 2019 lost revenue, due to the grounding, of approximately $4.1 billion.

Case Studies - Boeing 737 Max Grounding
Three airlines that have been significantly and negatively impacted by the grounding of the Boeing 737 Max include Southwest Airlines and American Airlines in the United States and Flydubai in the Middle East.

CASE STUDY 1: SOUTHWEST AIRLINES

• Among all airlines impacted by the grounding of the Boeing 737 Max, Southwest Airlines has taken the most significant hit in terms of its credit profile and sales.
• Southwest Airlines has traditionally relied on the 737 max as the foundation to its business, flying more of the 737 Max planes than any other U.S.-based airline.
• Additionally, Southwest Airlines has placed the most orders for 737 Max planes that are currently on backlog, with 280 planes awaiting order fulfillment.
• After the grounding of the 737 Max plane in March 2019, Southwest has denied boarding to 22,364 passengers voluntarily and an additional 2,525 passengers involuntarily.
• As a result of lost ticket sales and losses due to flight cancellations, Southwest's CEO, Gary Kelly, has stated that the grounding has cost Southwest $175 million, with that number expected to increase in later quarters as well.
• The grounding of the Boeing 737 Max has also caused the company's stock to plummet by 1%.
• So far, Southwest has handled the problem by simply removing the 737 Max plane from its flight schedule until at least January 2020 -- pending Boeing and Federal Aviation Administration approval; however, no further solution has been provided in the interim — leaving many flights canceled and passengers stranded in airports.
• Mr. Kelly has responded to questions regarding whether Southwest will look into other options for airline suppliers in light of the 737 Max grounding somewhat positively, stating that "[they will] look into it," though it is noted that adding a new supplier is a fairly complicated and lengthy task to undertake. 
• At the moment, Southwest is in talks of negotiations with Boeing to settle for damages as a result of the 737 Max crashes and CEO Kelly will plan to share "proceeds as appropriate" with Southwest employees. 
• Mr. Kelly anticipates that full recovery from the effects that the grounding of the 737 Max has had on the company will take at least a year.

CASE STUDY 2: AMERICAN AIRLINES

• Over 75,000 passengers have been denied boarding, either voluntarily or involuntarily, to American Airlines flights due to the grounding of the 737 Max, up twice the amount from 2018.
• The extension of the cancellation of flights through December 3, 2019 will result in a loss of 140 flights per day for American Airlines, the second-highest loss in daily flights behind Southwest Airlines.
• The company is estimated to have lost $185 million attributed to the grounding of the 737 Max plane.
• As a result of the grounding, American Airlines was the first U.S. airline to drop a route entirely, canceling once-daily flights from Oakland to Dallas indefinitely to meet the demand for other routes impacted by the removal of 737 Max planes from flight schedules.
• The intent for the cancellation of the Oakland-Dallas route was to minimize the number of impacted passengers by utilizing other planes to cover previous 737 Max routes.
• Affected passengers will be contacted by American Airlines customer service or travel agents with the option to either re-book or cancel for a full refund.
• American Airlines' stocks are lagging behind its competitors, down 11% this year.

CASE STUDY 3: FLYDUBAI

• Flydubai, a low-cost Middle East airline has cut 17% of its flight schedule due, in part, to the grounding of the Boeing 737 Max.
• The airline is also the only UAE-based company and the largest Gulf Cooperation Council company that operates the 737 Max and has had to cancel 15 flights daily in reaction to the grounding of the plane.
• While U.S.-based airlines have suffered significant losses due to the grounding of the 737 Max, losses pale in comparison to outside countries' companies which increased use of the model to meet increasing air travel demands and to build low-cost fleets.
• While stocks and share information is not publicly disclosed for Flydubai, given the nearly 20% reduction in flights and the $27 billion investment in 737 Max planes for 251 orders, it is expected that their credit profile has taken a significant hit in light of the grounding of the 737 Max.
• Flydubai's CEO, Ahmed bin Saeed Al Maktoum, has responded to the grounding of the 737 Max by saying that he could not "sit and do nothing," and is exploring the option of utilizing older Airbus models to replace the routes previously flown by the 737 Max 8 and 9 planes.
• The airline has also deployed Next Generation Boeing 737-800 models already to mitigate the losses attributed to the grounding of the 737 Max.
• With 251 orders of the 737 Max still underway, Mr. Saeed Al Maktoum has not indicated that there will be any hindrance to the deals in light of the groundings and that these deliveries will be made over the next decade.
• Flydubai will be seeking compensation from Boeing based on losses due to the grounding of the 737 Max, though Mr. Saeed al Maktoum has not disclosed how much the settlement pursued will total.