Airlines with MAXs seek cancellations, compensation from Boeing

Boeing is prioritising returning the 737 MAX safely back in service before getting into detail on the question of compensation. There are nearly four hundred MAX aircraft that airline operators are keen and eager to return to service. However, as the MAX grounding enters its fourth month, affected airlines around the world are growing impatient with Boeing over the OEM’s muted response to their calls for remedy.

Some carriers have begun exploring legal avenues to seek compensation from Boeing while others have deferred or cancelled orders. In this Insight, Ishka lists the airlines with cold feet on MAX commitments (or who have admitted doubts) and examines a concerted legal effort by several carriers to break exculpatory clauses in Boeing contracts.

 

Cold feet on the MAX

 

This week, Saudi low-cost carrier Flyadeal dropped out of a commitment for 50 Boeing 737 MAXs and instead turned to Airbus with an order for 50 Airbus A320neo including 20 options with deliveries starting in 2021. Flyadeal’s switch from Boeing to Airbus marked the first order cancellation for the MAX in favour of the Airbus product since the MAX was grounded in March.

The snub by the Saudi airline dents some of the reputational gains made by Boeing at the Paris Air Show with its surprise IAG letter of intent for 200 MAXs – presumably at a steep discount, as a majority of delegates speculated at Ishka’s Dublin Aviation Finance Festival last month (see earlier Insight). In addition to Flyadeal, Ukraine International Airlines is also reported to be considering a switch from the 737 MAX to Airbus aircraft, according to a report by Aviation Daily on 11^th June.

Net orders, including cancellations, in the first six months of 2019 give Airbus an advantage over Boeing. The European manufacturer reported 88 net orders as of 30^th June compared to Boeing’s negative -119 – however, that number is partly the result of 140 cancellations Boeing was forced to recognise to adjust to the new ASC 606 accounting standard, according to the OEM.

Ishka has identified another seven airlines who have either cancelled leasing contracts for undelivered MAXs or have acknowledged intentions to review, defer or cancel MAX orders.

 

Sources: Bloomberg, Reuters, Nikkei Asian Review, Forbes, Aviation Daily and Air-journal.fr

Click here to download the data behind the chart.

 

Airlines consider contractual claims

 

Some airlines impacted by the MAX grounding seem to be moving from words to action.

Law firms Bird & Bird and Lane Powell have teamed up to put together “the biggest club of airlines” making compensation claims against Boeing, Bird & Bird co-head of aviation Paul Briggs tells Ishka. Lane Powell is the largest law firm in Washington State that does not act for Boeing and lead litigator David Schoeggl has “years of experience of dealing with Boeing,” Briggs remarks.

Lane Powell are advising on claims under the Boeing purchase agreement, assigned warranties and Washington state law while Bird & Bird are helping negotiations with lessors and related commercial work.

Briggs explains that the airlines they are representing are “looking for a good deal, not acrimony” as they seek to maintain a “profitable long-term relationship” with Boeing. The firms ruled out filing with the Cook County plaintiff's bar, where Boeing is headquartered, and did so instead in Washington, as “nearly all” of Boeing’s contracts are governed by Washington state law.

Briggs declined to name the airlines represented by the two firms citing confidentiality but painted a picture of the situation faced by one of the implicated carriers. “Imagine if you were an airline that over this summer was proposing to restructure its fleet so that by the end of the summer you would have a third of the fleet MAX. Some of our clients are in breach of contract with lessors and their customers and are having to fight hard to survive,” he explains.

“Some have had to fire employees and terminate some of their summer season schedules due to events entirely outside of their control. The market initially reacted with compassion and empathy, but some lessors are now demanding payment of rent that has not been paid,” he adds, qualifying that lessors which are heavily invested in an airline relationship are “generally working hard” to help the airline manage the MAX grounding shock.

The airlines’ manufacturer agreements include express limited warranties to repair parts designed or manufactured but exclude all other liability. Historically, many OEMs sought to compensate their customers for losses caused by OEM failure as a reputational matter but legally it is necessary to "break" the exculpatory clause in order to be “held harmless,” the lawyer explains.

“Maybe it's time for the industry to look again at who has financial responsibility for a grounding,” Briggs says.

 

The Ishka View

 

Boeing is putting all efforts to fix and help recertify the MAX and, until the aircraft flies again, sources speaking with Ishka speculate that the OEM is also doing “everything possible” to delay agreeing on compensation or amending agreements. If an airline has had to cancel some of its summer season or find replacement ACMI aircraft, it may not want MAX aircraft scheduled for delivery in Spring 2019 until Spring 2020.

Some observers have pointed out that Flyadeal’s Airbus shift means it will receive the new narrowbodies in 2021, sooner than the projected 2023 first deliveries for MAXs, and cite this as the main reason for the change. While this may have been the main incentive behind the switch, Ishka believes Boeing could have just as easily offered earlier delivery slots. A number of airlines have deferred MAX deliveries in the next two years, Virgin Australia and Norwegian among them, while the Jet Airways collapse effectively wiped out 141 outstanding orders until 2023. If IAG transforms its letter of intent into a firm order for 200 MAXs it will not see deliveries until 2023. Safety, reputation and the operational advantages of having an all-Airbus fleet are likely to have factored in just as much, if not more, to Flyadeal’s decision.

Separately, the legal effort by some airlines against Boeing will be followed closely by every MAX customer in the industry. If successful in their claims, other airlines could consider launching their own, triggering outcomes that could concern aircraft investors. These could include cancelled orders, unplaced MAXs and, in the case of lessees in poor financial health, reliance on palliative compensation to survive.

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