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How the Bizarre Economics of Airplanes

Raises the Stakes of the Boeing Fallout
Joe Pinsker

7-9 minutes

Strange things can happen when a business is based on

millions of people flying around in $100 million metal
boxes that can take a year to build.

Mar 14, 2019

Joshua Roberts / Reuters

On Wednesday, the U.S. government ordered the

grounding of Boeing’s 737 Max airplanes, following
similar mandates in the preceding days by dozens of
countries after a crash of one such plane in Ethiopia.
The hundreds of 737 Max planes previously in service
worldwide are all currently grounded.
In many other industries, when a product has a flaw,
companies can rely on a range of workarounds, such as
other suppliers who can rise to fill the need, or other
products that can be subbed in quickly. But because of
the airline industry’s peculiarities—from the importance
of airlines’ in-advance flight-traffic projections to the
extraordinary cost of a single plane—this temporary ban
could have far-reaching, hard-to-contain effects.

Read: Here’s what was on the record about problems

with the 737 Max

The grounding will likely hurt Boeing, whose shares are

down after the Ethiopian Airlines crash and whose sales
might take a hit. It will likely hurt airlines, which now
have fewer seats with which to shuttle customers
around the country and the world. And it will likely hurt
passengers, who might have to adjust their schedule
and, in some cases, their spending. But most notable is
the scale of it all: Depending on the duration of the
grounding, it could cost all involved parties billions of
dollars.

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.)

Southwest isn’t the only U.S. airline with 737 Max planes.
American Airlines has pulled its 24 Max 8 planes out of
service, which affects about 85 flights out of the airline’s
roughly 6,700 daily trips, and United has grounded 14
Max 9 planes (a similar model), which together account
for some 40 flights a day.

Winston says that this shortage of capacity draws

attention to another quirk of airline economics: Only
American carriers are allowed to fly trips starting and
ending in the U.S. He’s in favor of extending what are
called “cabotage rights” to overseas airlines, one benefit
of which would be that they could provide more seats in
situations like this, after a surprise reduction in capacity.

Where does all this leave passengers? Winston expects

to see airlines cancel some flights and perhaps raise the
prices of others to compensate for the lost revenue.
That means some passengers might end up spending
more to get where they need to go on their preferred
timeline; others might just have to be flexible on their
departure time, consider another mode of transit, or not
go at all.

At this point, it’s not clear how long the grounding will
last, and while it is terrible publicity for Boeing, some
plane manufacturers have managed to fare all right after
their new aircraft has come under scrutiny. George
Hoffer, a transportation economist, pointed out to me
that the Douglas DC-6 and the Boeing 727 both went on
to have “stellar” careers after early incidents. So the 737
Max could yet recover—it just might get rebranded. “My
guess is that they will eventually … drop the Max” from
its name, Hoffer said. Though the true mark of success
would be for the plane’s name to go back to where it
was: out of the headlines and mostly unknown to
passengers.

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Joe Pinsker is a staff writer at The Atlantic, where he

covers families and education.