The two recent fatal accidents involving Boeing 737 MAX 8 aircraft and the subsequent grounding of the world's fleet of such planes by regulators create uncertainty as to the scale of financial risk to participants in the aviation industry. The most serious potential damage is to the manufacturer, Boeing Co., but that company has a strong financial position and liquidity, and we indicated in our March 11, 2019, bulletin that we currently do not see any effect on our rating on Boeing. The exact causes of each of the accidents, particularly the most recent one involving an Ethiopian Airlines plane, remain under investigation and final conclusions from investigators could differ from what initially may appear to be the cause.
Key Takeaways
While there are few 737 MAX planes in service because the jetliner is relatively new, the backlog of orders for this popular narrowbody jet remains high.
Although the disruption resulting from the grounding of the jets has generated worldwide attention, we do not see this as a major factor for the airlines or leasing companies that we rate.
None of our rated aircraft lease securitizations contain 737 MAX 8 aircraft, although the jets constitute partial collateral in two classes of equipment trust certificates issued by Air Canada.
We could revise our assessment of the 737 MAX aircraft if we conclude that the recent accidents will lead to a lasting diminution of collateral value or resale liquidity.
The 737 MAX series (which includes, in addition to the MAX 8 version, three similar models) is Boeing's newest family of narrowbody aircraft. Because it was introduced in 2016, there are relatively few currently in service--less than 400, compared with a world fleet of more than 22,000 passenger jet aircraft. However, there are much larger backlogs of these models ordered for future delivery to airlines and aircraft leasing companies (aircraft lessors). Therefore, the disruption caused by grounding the planes, while noticeable, should not be significant for rated airlines or lessors. The largest operators of the planes are rated airlines in North America: Southwest Airlines Co., American Airlines Inc., and Air Canada. In each case, the 737 MAX planes represent less than 5% of their total fleets. WestJet Airlines Ltd., another rated Canadian airline, operates fewer planes, but the 737 MAX represents a slightly higher proportion of its fleet. Airlines that lease planes from aircraft lessors are required to continue paying on their leases even if the planes are grounded, though the airlines may ultimately be compensated to some extent by Boeing. We believe that the proportion of 737 MAX aircraft in the fleets of rated aircraft lessors is very low--in the low single-digit percentages at most--though some have many of these planes on order.
We rate two classes of enhanced equipment trust certificates issued by Air Canada (the 2018-1 Class A and Class B) in which 737 MAX 8 aircraft form part of the collateral (four 737 MAX 8s and one 787-9). None of our rated aircraft lease securitizations contain 737 MAX aircraft. If we were to conclude that the accidents and their aftermath led to a lasting diminution of the collateral value or resale liquidity of the planes, we could revise our assessment of the 737 MAX 8 (and possibly other MAX models), which could lead to a downgrade. However, it would take time for evidence to support such a conclusion to become available and we believe there are several factors that indicate any significant damage is likely to be temporary.
The 737 MAX 8 is the best-selling version, by far, in Boeing's new technology narrowbody family of planes, with a long backlog of orders. The competing Airbus SE A320 neo (new engine option) family, also very popular, is the main alternative, but its backlog is similarly long. Indeed, both manufacturers have been straining to deliver even the planes currently committed due to various problems at their suppliers. Accordingly, airlines have limited choices even if they did want to switch. Airlines generally seek to operate a family of narrowbody planes from one manufacturer or the other because of the efficiency of operating a single fleet type. (Large airlines formed by mergers or those in the process of transitioning from one manufacturer's planes to the competitor are exceptions.) So once an airline has chosen one family of planes, it takes a lot to justify switching. The 787's problems in 2013, though they did not lead to fatal accidents, did not dent its long-term popularity. Boeing has huge incentives to make sure that the 737 MAX, one of its cash cows and a crucial long-term competitive factor, is perceived as safe. The company has indicated that it had been working on potential flight control software changes before the second accident occurred, but these must be approved by regulators.
This situation is likely to evolve as more information emerges from the investigation of the second accident and Boeing develops its proposed software changes. We will continue to monitor these and related developments for any credit implications.