General Electric added Boeing's grounded 737 Max airplanes as "a new risk" in its quarterly earnings report on Tuesday, citing production of engines for the planes and its ownership of several of the aircraft for its leasing business.
GE said it is "working arm in arm with Boeing while actively monitoring the grounding of the 737 MAX fleet." Despite the addition of the aircraft to the company's risks, GE reaffirmed the company's forecast for 2019 in its first-quarter earnings report.
The 737 Max has been grounded worldwide after the March crash of an Ethiopian Airlines plane. That crash came five months after another Boeing Max crashed in Indonesia. The Max's anti-stall software, MCAS, is suspected in the crashes that killed 346 people.
"Everyone should be aware of the fact that they're the sole source supplier of engines on the 737 Max," Daniel Babkes, Pzena Investment Management analyst, said on CNBC's "Squawk Box." "So it's not a surprise that if the fleet is grounded then there could be some impact in the near term."
GE delivered 424 engines to Boeing in the first quarter for installation on 737 Max aircraft. But, so long as the planes remain grounded, future deliveries will slow and perhaps even stop.
Additionally, GE Capital's aviation leasing unit owns 29 of the 737 Max aircraft and "has made pre-delivery payments to Boeing" for another 150 jets, GE said. In full, GE has about $1.5 billion of assets total tied up in owning 737 Max aircraft, the company said.
"No impairment charges were incurred related to the 737 MAX aircraft and related balances in the first quarter of 2019 as we continue to believe these assets are fully recoverable," GE said.
Here is GE's full risk assessment about the Boeing 737 Max:
"Aviation develops, produces, and sells LEAP aircraft engines through CFM International, a company jointly owned by GE and Safran Aircraft Engines, a subsidiary of the Safran Group of France. The LEAP-1B engine is the exclusive engine for the Boeing 737 MAX. In March 2019, global regulatory authorities ordered a temporary fleet grounding of the Boeing 737 MAX. Boeing has announced a temporary reduction in the 737 MAX production rate, and while CFM intends to continue its current production rate for the LEAP-1B, the announcement may impact the timing of those related cash flows.
GECAS owns 29 of these aircraft, all of which are leased to various lessees that remain obligated to make contractual rental payments. In addition, GECAS has made pre-delivery payments to Boeing related to 150 of these aircraft on order and has made financing commitments to acquire a further 19 aircraft under purchase and leaseback contracts with airlines.
As of March 31, 2019, we have approximately $1.5 billion of net assets related to the 737 MAX program that primarily comprises pre-delivery down payments and owned aircraft subject to lease offset by progress collections. No impairment charges were incurred related to the 737 MAX aircraft and related balances in the first quarter of 2019 as we continue to believe these assets are fully recoverable. We continue to monitor these developments with our airline customers, lessees and Boeing."