BofA: ‘The duopoly nature’ of the aircraft industry means Boeing is almost untouchable


Before the pandemic, two shocking airplane crashes ripped the cover off a scandalous situation: Boeing’s 737 Max was not fit to fly. First, in October 2018, a Lion Air 737 Max 8 crashed into the sea just after takeoff, killing all 189 passengers and crew, and the following March, an Ethiopian Airlines 737 Max 8 crashed just after takeoff, killing 157 on board. One of the costliest corporate scandals in history ensued as Boeing’s cozy relationship with the Federal Aviation Administration was exposed in subsequent reporting, including books such as “Flying Blind: The 737 MAX Tragedy and the Fall of Boeing.” The large-cap aerospace giant is still valued at roughly $140 billion today, but that’s a $100 billion-plus fall from grace after the crashes of the pre-pandemic era. (Boeing’s all-time high market cap, in 2019, was $248 billion.)

Now another Boeing model, the 737 Max 9, has run into issues, prompting the FAA to temporarily ground 177 of the aircraft over the weekend for emergency inspection. The terrifying cause was a door plug getting ripped off an Alaskan Airlines plane shortly after takeoff Friday, leaving a gaping hole in the side of the 737’s fuselage and forcing an emergency landing.

For Boeing’s CEO Dave Calhoun, who has been attempting to launch a 2024 comeback plan after years of recovery from the Max scandal, the Alaska Airlines incident is a big reputational hit that will strain relationships with airliners. But, in a sign of how little has changed since the crashes of 2018 and 2019, Boeing is in a category of just two worldwide, and Bank of America says this “duopoly” will help protect the company.

Boeing stock was hammered by the latest 737 Max issue on Monday, dropping as much as 9% before recovering some of its losses, but still wiping out over $9 billion in market value by 1 pm ET. Bank of America analysts led by Ronald Epstein explained in a Monday note that it was definitely a “worrying start to the new year” and they “do see the latest incident as eroding the fragile confidence that has been built around the 737 Max franchise.” Still, there won’t be a material impact on Boeing this year, they predicted, because Boeing and Airbus are the only game in town.

A protective duopoly 

Boeing and its European competitor, Airbus SE, dominate the global commercial aircraft market, representing roughly 90% of total market share, and holding roughly similar spaces in the American and European economies. That leaves airlines, especially American ones, with few alternatives to Boeing’s aircraft, and with Airbus running at capacity, sometimes Boeing is the only choice.

As a result, Epstein and his team said that they expect Boeing’s stock to be “weak” after the latest 737 incident, but they maintained their “buy” rating and $275 price target, implying a potential 20% jump in the stock over the next 12 months. 

The analysts explained that “due to the duopoly nature of the industry,” 737 MAX orders aren’t likely to be affected by the Alaska Airlines incident—at least for now. “Boeing is one of two players in a global duopoly for commercial aircraft which are in short supply, and we believe has been making steady if not slow progress addressing some of the internal shortfalls that led to its current situation,” Epstein and his team explained.

At the same time, Epstein and his team said that they believe the 737 Max’s issue on Friday was most likely caused by a “manufacturing quality” problem with the door plug, rather than a “design issue” that would be more costly to fix. Still, they warned that they are questioning the “impact of inexperienced labor” on quality control for the new Max aircraft.

The true effect of the Alaska Airlines incident on deliveries of Boeing’s 737 Max 9 will depend on the results of the investigations done by the FAA, the National Transportation Safety Board (NTSB), and foreign regulators, according to BofA’s analysts. The risk for Boeing is that this incident could potentially impact Max 9 deliveries to China as well as the certification of Boeing’s new Max -7 and Max 10 aircraft, they warned.

To be sure, “Boeing needs to tread carefully and cautiously through this potential reputational minefield,” Epstein and his team wrote Monday, arguing that, if the Boeing 737 Max line of aircraft continues to experience issues, “at some point, the flying public may lose confidence in the 737 Max which could ultimately impact sales.”

The Bank of America analysts warned that the latest 737 Max problems also occurred on an aircraft that “still had ‘new airplane’ smell and the sticker price in its window,” which is “worrisome.”

Boeing did not immediately respond to Fortune‘s request for comment.

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