Boeing 737 Max Grounding & the Aircraft Insurance Hard Market

The Boeing 737 Max grounding by President Trump yesterday could have a profound effect on the aviation insurance marketplace. The grounding arrives at a time when aviation insurance is transitioning into a hard market, making its timing fairly significant.

Grounding Liability is a coverage that manufacturers like Boeing carry in their Products Liability policies. It has to be triggered by an occurrence (the Ethiopian tragedy) and an official grounding by authorities. The policy covers the manufacturer for its liability when an alleged product defect grounds an aircraft. The claimants will be the operators and the damages can be significant depending on the length of time the grounding takes.

If the Boeing 737 Max grounding lasts a few days it should have no impact on the aviation insurance industry. But if it lasts as long as the Boeing 787 grounding when it entered service, it could have a significant impact. In the US alone there are approximately 70 of these aircraft in service. 70 jets out of service for months is a massive impact on the bottom line of these airlines and subsequently Boeing. Once you include the groundings that have also been issued by several governments worldwide you can start getting an idea of the numbers.

Here is some fuzzy math to give you an idea:

Flights per aircraft per day: 5

Average seating: 150

Average revenue per passenger: $180

Total cost per day for 70 jets: $9,450,000 per day in the US alone.

If we counted all 350 deliveries then the claim would be approximately $47,000,000 per day. But there are significant variables when considering the worldwide fleet.

There are also fixed costs that the operators have, which would have to be deducted. A complex and massive claim.

Since the area of the problem appears to be identified and related to the engine size and positioning, one could conclude the grounding will be relatively short. Stay tuned for updates.