It seems like every blog and news outlet reported about Boeing’s opening of a $50 million over the last day or two. However, I haven’t seen any of those articles putting that number – and the roughly $145,000 per victim’s family – into perspective.
On the other hand, I saw many people commenting on social media that the amount is too low. Social media being social media, and people being people, most of those claims were made without any numbers to back the claims up, of course.
As such, I decided to take a look at the compensation in relation to things like the revenues and profits generated for Boeing by the 737 MAX, Boeing employees’ compensation, the average salaries in the victims’ home countries, and the company’s share price. I’ll also look at the crashes’ effect on the share price overall.
Before I continue, let me tell you that I don’t think the compensation offered is high enough (I also think the families will receive more than the $145,000 from this fund in the end). At the same time, I can’t tell you how much I think the amount should be. The fact is, just like anyone other than the actuaries, I don’t know – putting a price on a human life is a tough task with no right answer.
What I hope, though, is that when you are finished reading, you will have at least a bit more understanding about the compensation from a variety of angles. An understanding that goes beyond just a dollar amount without any context – the way I see it reported in most cases.
The Compensation Fund and the Revenues & Profits of the 737 MAX
Boeing delivered 387 airframes of the 737 MAX (incl. all variants) to date making the amount put into the compensation fund per delivered aircraft $129,199. When accounting for the delivered aircraft as well as those on order, the amount per aircraft comes down to $10,140.
According to Boeing’s website, the average list price of a Boeing 737 MAX 8 is $121.6 million. As such, the compensation per aircraft calculated above amounts to 0.11% of a 737 MAX 8 list price when accounting for delivered aircraft only or 0.01% when taking into account the aircraft that have been ordered but haven’t been delivered yet as well. Keep in mind, though, that aircraft are often sold at considerably less than the official list price, and so, the percentages are likely a fair amount higher than that.
While no accurate numbers about Boeing’s per aircraft profit are available, Moody’s estimated that Boeing makes $12 to $15 million in operating profit per 737 MAX 8 it delivers. Taking the lower end of that estimate, it means that Boeing will have to deliver five of the aircraft to make the $50 million back and then some. To put that into perspective, the company has more than 4,500 unfulfilled 737 MAX orders.
The Compensation Fund and Boeing Employees’ Compensation
In 2018, Boeing’s CEO received $23.4 million in total compensation. That included a base salary of $1.7 million, as well as stock options, performance bonuses, and so on. In other words, his compensation was 46.8% of the total size of the recently announced compensation fund. Just for a bit more context, this compensation was awarded before the second deadly 737 MAX crash happened.
Taking just the base salary into account, it was 3.4% the size of the fund – or more than 11 times the compensation available to an individual victim’s family.
Talking about salaries, the median income of a Boeing employee in 2018 was about $127,000. That makes the compensation per victim about 14% higher than the median annual income of a Boeing employee.
The Compensation Fund and the Victims’ Incomes
Before I continue, let me preface this by saying that I by no means think human lives should be valued the way I outline below. Of all the number-crunching I did for this article, this one was (mentally) the most difficult one to do.
Also, keep in mind that I used a lot of averages and assumptions and didn’t use any “fancy” net present value formulas or similar. And so, the numbers might be considerably off. All that said, I think they are “good enough” to get a rough picture of the situation.
Based on my calculations – taking the average incomes of each individual victim’s home country – the total annual income the victims of the two crashes were making was around $4.2 million. It would have taken the victims about 12 years the total amount of the compensation fund.
On the Ethiopian flight, a significant portion of victims was from high income countries. As such, about $3.5 million of the above $4.2 million is attributable to this flight. Prorating the $50 million based on the number of victims, this flight’s victims’ families are eligible for about $22.7 million from the fund, an amount that would have taken the victims roughly 6.5 years to earn.
On the other hand, all but two victims in the Lion Air crash were from Indonesia, a relatively low income country. In other words, about $0.7 million of the $4.2 million is attributable to this flight. Taking the rest of the fund, $27.3 million, it’s an amount that would have taken victims about 36 years to earn.
The table below presents how much income the victims didn’t get to make for themselves and their families in a number of different scenarios. All of the calculations assume a retirement age of 60.
Once again, let me say that I am, by no means, saying that the amounts above would have been adequate compensations. As mentioned in the introduction, I have no idea what the ideal compensation would be – the income that an individual earns is just a very very small fraction of a person’s life. But, the numbers above still do put the $145,000 in compensation offered as part of the fund into perspective.
The 737 MAX 8 Tragedies and Boeing’s Shareholders
Finally, let’s look at the crashes – and the fund – from the shareholders’ perspective.
Reading headlines like “The 737 Max crisis has wiped more than $25 billion off Boeing’s market value” might make you think that the crash made the company’s shareholders lose a lot of money. While that might be true in some cases, in reality, only a small portion of shareholders actually lost money as a result of the two crashes at this point.
On October 26, 2018, the last trading day before the Lion Air crash, Boeing’s stock traded closed at $359.27. The day of the crash, it closed at $335.59 or about 7% lower than the previous trading day. However, just three days of trading later, on November 1, 2018, it closed at a price higher than its price the day before the first crash.
While it fell again afterwards, by the beginning of the year, it was trading consistently at more than $359.27 – the pre-ET302 crash price.
The stock then rose all the way to $422.54 on March 8, 2019, the last trading day before the Ethiopian Airlines crash. On March 11, 2019, the first trading day after the second crash, the stock closed at $400.01 or about 5% lower than the previous day.
The stock closed at $377.03 on September 23, 2019.
In other words, right now the stock price is lower than it was right before the second crash, but higher than it was after the first crash.
That means that, at this point, long-term investors that bought into Boeing before the first crash and continue to hold their shares to date did not lose anything (other than the unrealized, “imaginary,” profits while the stock was at its peak) as a result of the crashes. Neither did those that bought into the dip after the first crash and keep holding their shares to date.
Those that bought the stock right before either of the crashes and then sold it off as the stock plunged have, indeed, lost money. But then again, that is no different than any other “bad trade” – in other words, I wouldn’t attribute those losses to the crashes.
The Compensation Fund and Boeing’s Market Cap & Share Price
As you can see above, long-term investors other than those that bought the stock during the peak before the second crash have not lost any money as a result of the crashes. While that might, depending on the developments in the future change, let’s take a look at how the compensation fund compares with the company’s market cap and share price.
On September 23, 2019, Boeing’s market cap was $212.16 billion and its share price closed at – as mentioned earlier – $377.03. That means the company had about 562.1 billion shares outstanding.
In other words, the $50 million compensation fund amounts to $0.00009 per share. For comparison, the total amount that Boeing wrote-off as a result of the 737 MAX tragedies – about $5 billion – amounts to about $9 per share.
In terms of the company’s value, the fund is equivalent to roughly 0.00002% of Boeing’s market cap.
As mentioned in the introduction, I think the compensation offered by Boeing through this fund is lower than it should be. At the same time, I am not sure how much – or what form of – compensation it actually should be. After all, it’s impossible to express a value of a human life solely in dollar terms.
Overall, though, I would say that as long as the compensation remains proportionate to an individual victim’s economic standing and disproportionate to the company’s, taking shortcuts in development, certification, and other areas will remain a calculated risk, not an existential threat for the company. This applies to aircraft manufacturing as well as any other industry.