Social media drove airlines' reputational hit after 737-Max disasters

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Social media drove
airlines’ reputational hit
after 737-Max disasters
By Theo Wayt
January 20, 2021.

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%

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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

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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.

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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.”

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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.

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