Airlines with more Boeing planes in their fleets suffered serious reputational damage that negatively impacted their share prices in contrast to their more diversified competitors as information about two high-profile crashes involving the Boeing 737-Max spread rapidly on social media, according to new research by economists in the U.K. and Ireland.
Specifically, the researchers examined share performance and social media data around the crashes of Lion Air Flight 610 in October 2018 and Ethiopian Airlines Flight 302 in March 2019, which killed a total of 346 people. Both disasters were later determined to be caused by a new automated flight control system installed in the 737-Max, an updated version of Boeing’s 737 series jetliner.
Their findings were published in the January 2021 issue of Economics Letters.
“We broke down what were basically Boeing houses, those that had mixed fleets, and those that didn’t have Boeing at all,” said co-author Charles Larkin, director of research at the University of Bath’s Institute for Policy Research. “As you would expect, those airlines with 100% Boeing did have a negative impact. The second crash really hit them very hard. It was clear that there was a recognition by investors that this could undermine the profitability of those operations.”
In response to the accidents, virtually all 737-Max planes were grounded for nearly two years. The American Federal Aviation Administration cleared the planes to fly again in November of 2020, and on Jan. 19 of this year, a key European regulator said that the 737-Max would be allowed to fly in about one week.
Larkin, who conducted the study alongside Iulia Cioroianu of the University of Bath and Shaen Corbet of Dublin City University, said that negative investor reaction toward airlines with larger numbers of Boeing planes was driven largely by social media, where news and information about the accidents spread quicker than public relations departments could control.
“In a world in which Twitter and social media like Twitter exist, you do not have the capacity to shake the story. You do not have the capacity to explain things,” said Larkin. “Twitter will have that out and viral before your media guy can get ahead.”
Larkin said that documents such as press releases and earnings reports were “the bread and butter of the old system” but are now less important than social media sentiment. The researchers deliberately chose to avoid using media outlets like the Financial Times, Wall Street Journal and Bloomberg as “sentiment datasets,” opting instead for Twitter.
For the study, the researchers collected 255,000 tweets from January 2016 through February 2020 that mentioned terms such as “737-Max” and “Boeing,” as well as stock trading data from Thomson Reuters.
The researchers incorporated the data into a mechanism based on a GARCH model, which measures volatility in financial markets. The model then produced scores measuring investor sentiment that incorporated Twitter data and financial market returns in comparison to general aviation sector market performance and the overall stock market.
The model’s “clear and significant results” showed significant damage to many Boeing-dependent airlines in comparison to the broader aviation sector.
In particular, 5 out of 9 airlines with 100% Boeing fleets, including popular budget airlines like Ryanair and Southwest, “were influenced significantly with regards to the negative sentiment surrounding the 737-MAX” at at least the 1% significance level.
Among airlines whose fleets consisted of less than 100% but more than 50% Boeing planes, just one — Icelandair — suffered a statistically significant hit during the same time period.
Airlines seeking to cut costs often concentrate their fleets with a single manufacturer like Boeing or Airbus, Larkin said, which allows companies to buy in bulk and save money on pilot training and plane maintenance.
The 737-Max disasters clearly showed the risks of that strategy, according to Larkin.
“If you’re going to be a Boeing house and Boeing planes start falling out of the sky, that’s not going to wash off,” said Larkin, who has also lectured at Trinity College Dublin and advised the Irish Parliament. “Diversification provides you with an element of protection.”
Earlier this month, a Boeing 737-500 aircraft crashed near Jakarta, Indonesia, killing all 62 people aboard. The aircraft was an earlier model that was not equipped with the flight control system responsible for the recent 737-Max crashes.
Larkin said the crash was likely due to mechanical or pilot error and will therefore probably have less of an impact on Boeing shares or the airline sector in general.
“When the announcement was made, you were probably going to see a bunch of data of people shorting Boeing,” he said. “But if you looked at the data, you’d probably find that it evened out quite quickly.”
However, Larkin added, “If it was a 737-Max that fell out of the sky, you’d probably see our result but worse.”
The paper, titled “Guilt through association: Reputational contagion and the Boeing 737-MAX disasters,” was published in the January 2021 issue of Economics Letters. The authors were Iulia Cioroianu and Charles Larkin of the University of Bath, as well as Shaen Corbet of Dublin City University. Cioroianu was lead author.