Financial Management Report: Boeing 737 MAX Impact Analysis

This report provides a comprehensive financial analysis of the Boeing 737 MAX crisis, examining the interplay between profit maximization and shareholder value maximization. It evaluates the operational aspects of Boeing, highlighting how cost-cutting measures and design flaws in the 737 MAX led to severe financial risks and ethical concerns. The report delves into applicable financial principles, such as risk and return, incentive structures, and market price reflection, demonstrating how the crisis impacted the company's profitability and market value ratios. The analysis includes a graphical representation of stock price movements before and after the crisis, illustrating the decline in shareholder value. Furthermore, the report incorporates a reflection on ethical principles in business conduct, using a personal experience to underscore the importance of balancing profit with stakeholder interests. The conclusion emphasizes the significance of ethical considerations in financial management and the need for companies to evaluate strategies in light of both short-term and long-term returns. The report references several sources to support its claims.

FINANCIAL MANAGEMENT

PART A- REPORT

Contents
Introduction................................................................................................................................3
Overview of the operations of Boeing.......................................................................................3
Evaluation of applicable principles of finance...........................................................................4
Impact on the profitability of the company and market value ratios.........................................5
Analysis of the impact of Boeing's issues with its 737 Max on the value of the business........5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

Introduction
A business organisation is rightly referred to as the conjunction of various resources from the
society and thus is entrusted with the responsibility of the conduct of business in accordance
with the desires of various stakeholder groups. Hence, the basic objectives of the businesses
can be stated to be the generation of revenues in a manner that confirms with the legal
framework as well as the moral principles. In addition, it is imperative to note that one of the
chief objectives of the entities is to operate in a manner that leads to the maximization of the
long-term value of the shareholders. Thus, while earning short-term profits is essential to
keep the entity going, maintaining the shareholder value is equally significant in context of
consistent provision of valuable goods and services to reflect the same in the share prices for
the owners (Harrison and Wicks, 2013).
The following report is aimed at evaluating the profit maximization and the shareholder value
maximization of the entities taking the case study of grounding of Boeing 737 Max following
the crash of an Ethiopian Airlines flight. The evaluation is certainly aimed at highlighting the
various aspects of the financial management.
Overview of the operations of Boeing
It was regarded as an extraordinary event when the two brand new aircrafts of the same entity
crashed because of the identical malfunctions in Indonesia and Ethiopia within a gap of five
months last year. The research conducted led to the revelations that one of the major factors
that led to the said crashes was the dedication of the senior executives of Boeing towards
enhancing the company's profits and stock yield (Fischer, 2019). This was done by the
structural flaw in the design of two aircrafts which was outsourced to the lower-paid
contractors that lacked deep background in aerospace. Hence, it is quite
evident that from the business perspective of earning the short-term
profits, the entity not only engaged itself in cost cutting exercises by
cutting the costs of the manufacturing of the relevant software systems,
but also led the safety at bay by faulty MCAS systems (Johnston and
Harris, 2019). It has been stated that the software designers employed at
the time of crash had led to the violation of basic principles of laying off
the experienced Boeing engineers over the years in light of the cost
efficiencies. The above acts are all in line with the profits enhancement

objective of the enterprise. In contrast to this, the shareholder value as
stated above is characterised by delivering valuable goods and services
considering the interests of the stakeholders. The vital fact to be noted
here is that the flaws in the sensor operations were discovered by the
entity through a warning being raised in year 2017. However, the
information of the same was not provided to the regulators on the
determination of the engineers that the same was not a safety concern
(Robinson, 2019). The said act interferes seriously with the safety of not
only passengers but also challenges the objective of shareholder value as
a whole. This is because following the crash, the shares of the entity
plunged in a whopping manner. Thus, from the analysis above, it can be
stated that the entity has been operating with the objective of
maximization of profits and not the maximization of the shareholder
value.
Evaluation of applicable principles of finance
The key principles that are applicable on the case study in question are elaborated as follows.
The first key principle that the entity is subjected to is that of risk and return. The entity had
sought the means of cost cutting to maximise the short-term returns, however the same
exposed it to the severe financial risks. The aftermath of the crashes is known to be the
grounding of the 737 Max aircrafts globally (Yapp et. al, 2019). This resulted in severe
public relation challenges for the enterprise influencing the Boeing’s reputation and brand. In
addition, the company was asked to make costly concessions to airlines because the
customers were forced to cancel their flights post grounding (Case and Smith, 2019). Hence,
the application of principle of risk and return state that entity must evaluate the same before
opting for any step in terms of business operations.
The next principle that is applicable is the incentive structure and the individuals’ responses
to the same. It is vital to note that the airline business is comprised of numerous stakeholders,
such as the flight personnel, regulators, insurance underwriters, engine and component
manufacturers, airframe manufacturers, operators, labor unions, travel and booking
companies, and others. There are opposed interests and thus the conflicts among the
stakeholders. The manufactures mainly and other stakeholders are granted incentives for the
acceleration of the work, as a result of which the safety is undermined.

The yet another principle that is applicable on the said case study is the principle of market
price reflecting information. It is imperative to note that the ban on the aircrafts by the
regulators led to the driving down of the company’s share prices. The stock prices of the
company had slashed by 11.2 percent within 10 days span as the Commercial Airplanes
manufacturing unit contributed to approximately 60 percent revenues of the entity Boeing
(Dykewicz, 2019). Hence, it is clear that the stock prices of an entity reflect the information
in market about the entity.
Impact on the profitability of the company and market value ratios
The grounding ban is stated to likely impact the brand in terms of goodwill as well as the
profitability and market value as a whole. Following the grounding, the entity would be left
with fewer carriers for the shuttling of the customers around the country as well as the world.
This will impact the sales of the enterprise severely. In addition, billions of dollars may be
lost for the various stakeholders therein. The falling prices of the stock as stated in the
previous sections, would result in the fall in the company’s market value, further hurting the
demand of the plane all over the globe. The 737 Max was one of the entity’s best-selling
aircrafts and the fact that the airlines might cancel the orders owing to the safety issues in the
aircraft; would result in severe profit plunging down for the enterprise.
Analysis of the impact of Boeing's issues with its 737 Max on the
value of the business
It is vital saying to be noted that the share prices maximization is one way of reflecting on the
maximization of the shareholder value of an entity (Queen, 2015). The impact of the crash
and grounding issue of the Boeing 737 Max on the value of the business can be understood
with the aid of the following graphical representation as derived to study the stock price
movements before and after March 11.

(Source: Yahoo Finance, 2019)
As per the analysis of the graph obtained by plotting the quotes of stock prices of year 2019,
it can be stated that the market prices fell steeply in mid of March as in contrast to the
consistent rise since the beginning of the year 2019. In addition, it is evident that the share
prices are exposed to severe fluctuations post the month of March and present an overall
declining trend in the value of the company. Thus, it can be stated in terms of the shareholder
value that the same declined as compared to the earlier value and has been fluctuating on
negative side as depicted by the share price movements of the year 2019, specially post the
issues.
Conclusion
The discussion in the previous parts regarding the various aspects of the financial
management enable to conclude that it is significant for the entities to create a healthy
balance between the profit maximization and the shareholder value maximization objectives.
With the aid of the case study of Boeing it has been understood that the entity has been
suffering severe goodwill and revenue losses following the grounding which was an
aftermath of cost cutting in designs aimed at short term profits. The result of the same is
decreasing shareholder value and increasing financial risks for the enterprise. Hence, it is
responsibility of the management of entities to evaluate the strategies in light of long term
and short term returns before implementing the same.

References
Case, B. and Smith, M. (2019) Boeing's credit rating at risk because of 737 Max crisis, says
Fitch [online] Available from:
https://www.business-standard.com/article/companies/boeing-s-credit-
rating-at-risk-because-of-737-max-crisis-says-fitch-119072201509_1.html
[Accessed on: 25 September 2019].
Dykewicz, P. (2019) Boeing 737 MAX Crashes Cause Turbulence For Stock [online]
Available from: https://www.stockinvestor.com/40367/boeing-737-max-
crashes-cause-turbulence-stock/ [Accessed on: 25 September 2019].
Fischer, D. (2019) Was Boeing’s Compensation Committee Sufficiently Independent in
Judging the Business Risk of the 737 Max?. [online] Available from:
https://dx.doi.org/10.2139/ssrn.3370066 [Accessed on: 25 September
2019].
Harrison, J. S. and Wicks, A. C. (2013) Stakeholder theory, value, and firm performance.
Business ethics quarterly, 23(1), pp. 97-124.
Johnston, P. and Harris, R. (2019) The Boeing 737 MAX Saga: Lessons for
Software Organizations, 21(3), pp. 4-12.
Queen, P. E. (2015) Enlightened shareholder maximization: is this strategy
achievable?. Journal of Business Ethics, 127(3), pp. 683-694.
Robinson, P. (2019) Boeing’s 737 Max Software Outsourced to $9-an-Hour
Engineers [online] Available from:
https://www.bloomberg.com/news/articles/2019-06-28/boeing-s-737-max-
software-outsourced-to-9-an-hour-engineers [Accessed on: 25 September
2019].
Yahoo Finance (2019) The Boeing Company (BA) [online] Available from:
https://finance.yahoo.com/quote/BA/history?p=BA [Accessed on: 25
September 2019].
Yapp, A., Kim, L. C., Kuan, G. K. and Zainudin, H. (2019) The application of
immersive technology, virtual reality in electronic tourism. International

Journal of Advanced Research in Technology and Innovation, 1(1), pp. 8-
13.

PART B- REFLECTION

According to me, one of the most significant aspects of business conduct is the consideration
of the ethical principles in terms of the interests of the various stakeholder groups, while the
entities strive for the maximization of profits. The ethical principles are referred to as the
legal framework and rules applicable to the entity, together with the moral or custom
principles (Kidwell et.al, 2013). One of the experiences as a part of an organisation where I
was exposed to the significance of the ethical principles is stated as follows.
The issue in the stated experience was that the senior management of a company was
contemplating the use of the machines driven by artificial intelligence or robots for certain
organisational tasks in lieu of humans. The result of such a review could have been the
replacement of employees with the robots leading to the loss of jobs of several employees of
the entity. However, the situation was addressed in a manner that a balance was created
between the machines or robots and the employees of the entity and certain employees were
transferred to new job responsibilities or departments, instead of the altogether termination of
the employments. It can be rightly stated that the said move was a welcome move by all the
stakeholders of the entity in light of creation of sustainable long-term value to the
shareholders and not just maximising the short-term profits.
There were definitely conflict of interests involved as elaborated follows. I remember, a
section of shareholders and other supporting investors of the technology were in favour of the
complete use of robots owing to the benefits of cost and time reduction in performance of
business operations. It was noted that the robots would perform the same task in one fourth of
time than required by humans and thus the salaries of numerous employees would not be
required to be paid by entities. However, this would have led to the employees of the entity
being severely harmed by losing their jobs. In addition, the few stakeholders as well as
regulators raised the safety concerns in use of robots as to who will bear the responsibility of
errors and accidents due to complete automation of operations.
As a result, the decision to complete automation was not implemented
and the stakeholders that were in support of the same were made to
understand the safety concerns and the need of human intervention in
context of the control being exercised on robots which was regarded as
vital.
Yes, according to the review of the stated article and as per my personal
work experience, the significance of the finance has reached to that level

in the entities where the ethical principles and corporate governance are
at times ignored. Therefore, it is important for the management of entities
to establish clear policies and lead from front to maintain a healthy
balance between finance and ethics.

References
Kidwell, L. A., Fisher, D. G., Braun, R. L., and Swanson, D. L. (2013) Developing learning
objectives for accounting ethics using Bloom's taxonomy. Accounting Education, 22(1), pp.
44-65.