Boeing heads to federal court in Chicago on Thursday
for a hearing related to wrongful-death litigation being brought by families of
victims of the Ethiopian Airlines 737 MAX flight that crashed in March, killing
all aboard.
It is another facet of the MAX drama for investors
to consider.
Sizing up all the financial consequences from the
MAX problems has been difficult. There are numerous issues to keep track
of—such as payments to airline customers for lost sales, pilot training costs,
and potentially higher future costs to build MAX jets. There is also potential
market share ceded to Airbus (ticker: AIR.France) in the narrow-body segment of
the commercial jet market.
Legal liabilities stemming from wrongful-death
lawsuits haven’t been discussed as much as the other issues. The legal
consequences fall far down the list of investor concerns, at least for now.
That might be a mistake, because the allegations in the lawsuit are broader
than typically found in such litigation.
“We aim to prove Boeing’s conduct was reckless,”
Robert Clifford, lead counsel for the plaintiffs, said in an interview.
Clifford thinks Boeing (BA) was aware of MAX issues, especially after the first
fatal crash involving a Lion Air 737 MAX jet, yet the company let the plane
keep flying. That, according to Clifford, exposes the company to potential
punitive damages that could be higher than is typical in other aviation
accidents he has worked on.
“We extend our deepest condolences to the families
and loved ones of all those onboard Ethiopian Airlines Flight 302,” a Boeing
spokesperson told Barron’s in an emailed statement. “As the accident
investigation continues, Boeing is cooperating fully with the investigating
authorities. We won’t comment on the lawsuits directly.”
Compensatory damages are based on factors such as
lost income and grief. They can reach into the millions of dollars per case.
Punitive damages can be up to 10 times the amount of a compensatory award.
Seven crew members and 150 passengers died in the Ethiopian Airlines flight.
Taking a $2 million compensatory damage award as an example, Boeing’s
liability—including theoretical punitive damages—could reach $3 billion to $4
billion, based on the 157 deaths. The final number will likely be different,
and the individual cases could take years to fully resolve.
Kenyan-born Paul Njoroge lost five family members
on the Ethiopian Airlines fight: his wife, three children, and mother-in-law.
He is part of the litigation but said he wouldn’t follow Thursday’s
developments closely. Instead, he is hoping for reform to aviation oversight to
help bring closure. “The legal case won’t fix the plane; the regulators need to
fix the plane,” Njoroge said.
The potential liability from compensatory and
punitive damages could rival the amount of money Boeing set aside to compensate
airline customers. American Airlines (AAL) and Southwest Airlines, among
others, have recently struck deals with Boeing related to costs incurred while
the MAX has been parked. As a result, the $5 billion set aside for airlines has
received more attention than other legal entanglements.
Boeing has set aside $50 million for victim
compensation, which isn’t tied to any litigation. It is, essentially, money
offered to help victims’ families. Boeing referred Barron’s to the fund
administrators when asked about distributions made to date.
Boeing shares are down about 25% from all-time
highs, trailing far behind gains of the S&P 500 and Dow Jones Industrial
Average over the same span.
The decline amounts to about $60 billion in lost
market value. It is difficult to say whether that is enough to account for all
of the MAX issues. The MAX is only a portion of the company’s commercial
aerospace business. Boeing is also large defense contractor.
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