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Jan 9, 2020

Boeing faces US$5-billion tab on 737 Max simulator training

Firing CEO easy, but culture at Boeing is broken: Crisis management expert

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Boeing Co.’s costs would rise an estimated US$5 billion if pilots need to get simulator training before flying the 737 Max, according to Bloomberg Intelligence.

That would nearly double the US$5.6 billion that Boeing had committed to cover costs from last year’s grounding of the jetliner. The manufacturer will be expected to reimburse airline expenses for simulator training because it sold the plane on the basis that pilots certified for the previous 737 variant would need minimal additional training, analyst George Ferguson said in a note Thursday.

The manufacturer on Tuesday said it had advised regulators that pilots need more than brief tablet-based training before flying the Max, reversing its previous stance in part because of revisions to the plane after two crashes killed 346 people. Simulator training would delay the return of the aircraft, Ferguson said. The decision on simulators is up to regulators, who have yet to approve the plane’s return.

“Our estimates show the cost of airline lost profits will probably exceed Boeing’s US$5.6-billion reserve just for 2019,” he said. “As the production pause stretches on, suppliers will run into more financial difficulty, perhaps even needing support from Boeing.”

Boeing’s compensation to Southwest Airlines Co., the largest operator of the Max when it was grounded in March, likely will exceed US$1.2-billion if the plane remains parked through this quarter, Ferguson estimated. That would be 22 per cent of the US$5.6 billion that the manufacturer has set aside. Southwest hasn’t disclosed terms of its agreement with Boeing but said the grounding reduced operating income by US$830 million last year.

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Using Southwest as a benchmark, Ferguson bases his estimates on 385 Max planes in fleets at the time of the grounding, plus an order backlog of 4,543 jets — all sold before regulators ordered the aircraft parked.

American Airlines Group Inc. and Grupo Aeromexico SAB also have reached confidential agreements with Boeing.

Savanthi Syth, an analyst with Raymond James Financial, also has said Boeing likely would bear the costs of incremental pilot training on the Max.

Boeing rose 0.5 per cent to US$332.99 at 9:41 a.m. in New York. Through Wednesday, the stock was down 7.8 per cent since the first 737 Max crash in October 2018, while the Dow Jones Industrial Average advanced 16 per cent.