The Worst Mistake Boeing Investors Can Make Right Now

History suggests it's not a good idea to sell Boeing stock on the back of recent events.

Lee Samaha
Lee Samaha
Apr 8, 2019 at 9:45PM
Industrials

The stock of Boeing (NYSE:BA) has sold off heavily in the aftermath of two recent crashes. But investors shouldn't rush to conclude that the 737 MAX aircraft -- which was involved in both accidents -- is set for wide-scale order cancellations. At least that's a conclusion that can be reasonably drawn from the similarities with an incident a few years ago on a Lufthansa flight with an Airbus (NASDAQOTH:EADSY) plane. Let's take a look at what happened then and why Boeing investors might want to sit tight.

What happened on the Lufthansa flight

The two Boeing 737 MAX crashes -- Ethiopian Airlines Flight 302 and Lion Air Flight 610 -- share something in common with Lufthansa Flight 1829 on Nov. 5, 2014, which rapidly lost 4,000 feet in altitude before the pilots regained control. In all three cases, computer-controlled systems erroneously detected an aircraft stall was about to take place and suddenly pushed the nose down, causing a steep descent.

A plane's wing is seen above clouds.

Image source: Getty Images.

The sensors that produced the faulty information are referred to as angle of attack (AOA) sensors, and there are typically at least two of them, with at least one on either side of the plane. In the case of the Boeing 737 MAX, the computer-controlled system is known as the Maneuvering Characteristics Augmentation System (MCAS). Unfortunately, the pilots of the two Boeing planes were not able to regain control of the aircraft as MCAS kicked in and sent the planes into rapid descent.

At this point, it's important to note that the sensors are physical equipment and subject to wear and tear. For example, they could be damaged by a ground vehicle, a bird striking them, or, as in the case of Lufthansa Flight 1829, they can even become frozen through a steep ascent in a very cold environment.

In other words, the AOA sensors can give faulty information, but the questions people want answered include how the automated systems work and how pilots are able to override them should they push the aircraft into a descent.

What Boeing is doing about it

As a consequence of events, Boeing is working on an MCAS software fix to provide additional layers of protection. 

According to the Boeing website:

  • The flight control system "will now compare inputs from both AOA sensors," and "If the sensors disagree by 5.5 degrees or more with the flaps retracted, MCAS will not activate."
  • "If MCAS is activated in non-normal conditions, it will only provide one input for each elevated AOA event."
  • "MCAS can never command more stabilizer input than can be counteracted by the flight crew pulling back on the column. The pilots will continue to always have the ability to override MCAS and manually control the airplane."

In plain English, the first point means MCAS will rely on data from two sensors instead of being able to be activated by one sensor. The second point means MCAS will not continue to push the plane into descent multiple times based on one AOA event -- which could be due to sensors being stuck. The third point means pilots will be able to counteract the effect of MCAS.

This article is not the place for a discussion of why these layers of protection were not already in place. However, these would be pertinent questions to ask considering that during the Lufthansa flight on an Airbus plane, the pilots were also unable to correct the descent using the column -- a precedent had been set.

The Lufthansa pilots managed to save the plane only by disengaging a sensor on the advice of the ground crew (fortunately, the flight's relatively higher altitude gave them more time to adjust than with the Boeing crashes). Consequently, Airbus pilots have been made aware of the issues, and procedures have been put in place to deal with such problems.


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What it means to Boeing investors

The key question from an investing perspective is whether the recent events will lead to a significant long-term financial impact on Boeing. There will obviously be a near-term financial cost to Boeing, but given that a software fix is in the works, it looks unlikely that it will be a lasting one.

AOA sensors can -- and are always liable to -- give faulty information. But the Lufthansa incident didn't lead to wide-scale order cancellations or customers switching to alternative models from Airbus. It's something for Boeing investors to consider before they panic-sell the stock.