Start with Boeing. The price of the company’s stock fell more than 10 percent, which represented nearly $30 billion of the company’s market value, in the days after the crash. One of investors’ worries is that the reputation of the 737 Max—which was also involved in a crash last fall in Indonesia—is now tarnished to the point that it will hurt demand for the plane. This is no small concern: The 737 Max, a jet that costs more than $100 million, is Boeing’s all-time best-selling aircraft, and the company is lined up to sell several thousand more. If airlines cancel their orders, Boeing would stand to lose billions of dollars. (The company did not respond to an interview request.)
Volodymyr Bilotkach, an economist at Newcastle University and the author of The Economics of Airlines, says that if cancellations do materialize, Boeing likely doesn’t have a great Plan B, but neither does anyone else. The airplane-building industry, he says, is an “effective duopoly,” meaning it’s dominated by two suppliers: “There is no way Airbus”—the other half of the duopoly—“will be able to come to the rescue, as that manufacturer’s order book is also not empty.” Indeed, one analyst who follows Boeing closely told Bloomberg earlier this week that his firm didn’t see “meaningful long-term risk” for the company. (Bilotkach says it’s possible that instead of taking their business elsewhere, some airlines might opt for older Boeing-made models with safer records.)
Airlines—Boeing’s customers—are not in a great position either. The primary challenge in the industry, says Clifford Winston, an economist at the nonpartisan Brookings Institution, is how far in advance airlines have to decide how large their fleet should be at any given time. “A plane takes a long time to make,” he says—sometimes a year or longer, and even buying used planes can take a while. Airlines’ task, in essence, is to guess how many people want to go from, say, Nashville to Denver on this day next year, and then buy a bunch of elaborate, $100 million metal contraptions accordingly.
Because airlines’ fleets are assembled according to long-term projections, they might have trouble adapting quickly to events that hurt demand, such as recessions or terrorist attacks.“That’s when they lose a ton of money,” Winston says.
Grounding a certain model of plane, while it affects the supply of (not the demand for) seats, can have a similar effect. Planes are such a big investment that once an airline buys one, it wants to put it to use as much as possible, which means, Winston says, “it’s not like they have a bunch lying around” for situations like this. Basically, airlines are now stuck making the most of what they already have.
Southwest Airlines, for example, is grounding its 34 Max 8 planes, which it says accounts for fewer than 5 percent of its daily flights, and relying on “every available aircraft in our fleet” to carry out its operations. Fewer than 5 percent might seem small, but it can interfere with the delicate capacity-demand calculus that airlines perform months or years in advance. Because the duration of the grounding is unknown, it’s hard to say exactly what damage it will do, but Winston estimates that if the 737 Max planes stay out of service for months, the losses to the industry and passengers “could run in the billions of dollars.” If the grounding ends much sooner, the losses will probably be much smaller. (Southwest told me that it doesn’t comment on financial estimates outside its official earnings updates.)