Boeing, its suppliers and some weaker airline credits could come under credit ratings pressure this year if complex safety problems are identified with the 737 Max, Fitch Ratings warns.
The agency says in a research note that there are several possible scenarios from the recent crashes of 737 Max 8s operated by Ethiopian Airlines and Lion Air that have led to the grounding of the world's 737 Max fleet, but stressed that it is not taking rating action yet.
“Most concerning would be a harsh scenario including a systemic issue with the aircraft leading to lengthy groundings, material delivery delays, significant order cancellations and negative public sentiment toward the Max,” the agency says.
As such, it says that a key data point will be the initial findings of the Ethiopian crash, and particularly any similarities there are with the Lion Air crash of 29 October 2018.
“If there is a correlation between the causes of the two recent crashes, we expect the situation to worsen, and lengthy groundings and delivery delays to ensue,” Fitch states. “Similarities between the Lion Air and Ethiopian Airlines accidents would possibly indicate the presence of a design flaw that would need to be addressed. We would monitor the amount of time and resources needed to address such an issue.”
The ratings agency signaled that it would “watch for the effects on the flying public’s sentiment towards the Max”, and the ability of airlines to acquire spare capacity to replace their 737 Max jets.
Its A-rating with a stable outlook on Boeing is not immediately affected. Fitch notes that the company has substantial liquidity, financial flexibility, diversified revenue streams and low leverage.
“Groundings and delivery delays would likely need to last beyond several months for the company's rating to be affected, although Fitch could revise the rating outlook or place it on Rating Watch sooner. Legal liability for the crashes and compensation for replacement capacity are additional watch items. Reputational damage could also be substantial, although Boeing has weathered previous crash episodes.”
It notes that if a significant fix to the 737 Max is required, Boeing could be forced to move resources from the proposed New Midmarket Airplane to deal with that. It could also increase scrutiny of the certification programme for the 777X.
There could be some fallout for the aircraft finance sector too, although the agency notes that it does not expect the Max issue will have a material effect on the aircraft lessors that it rates.
There may be a mixed impact on aircraft-secured debt transactions, however, with those containing Max aircraft potentially coming under pressure. That may be offset though by higher valuations on other aircraft in those deals.