New blow for Boeing
US aerospace giant faces compensation bill for 737 Max grounding, report Alan Tovey and Oliver Gill
Travel agent Tui could ask for indemnity after warning of €300m loss
Tui, the world’s biggest travel agent, has shocked investors by warning of a crippling €300m (£259m) hit from the grounding of Boeing’s 737 Max planes. The company, which has an order for 72 of the aircraft, said the costs were for finding replacement aircraft, additional fuel expenses and disruption.
Boeing has been plunged into crisis after an Ethiopian Airlines flight crashed earlier this month, killing 157 people. Aviation authorities around the world grounded their 737 Max planes in the wake of the disaster. It came just five months after a Lion Air crash in Indonesia, also involving a 737 Max, which cost 189 lives.
If the aircraft remain grounded until July, Tui said profits would be €200m lower. Should the company have to extend mitigating actions until the end of the summer, it will take an additional €100m hit. More than £200m was wiped off the value of Tui in London as shares dropped 4pc.
Insiders said that Tui had opened talks with Boeing over the “question of compensation” to recoup some of the costs. It is understood that this could take the form of a combination of a lump sum cash payment and discounts on future orders.
The sheer size of the price tag Tui put on the grounding should set off alarms at Boeing.
Tui is not the biggest operator of the 737 Max: US budget carrier Southwest has 34, Air Canada, American Airlines
‘In aircraft leasing prices have gone up because there’s more demand. The lessors are very smart and make good money out of other people’s problems’
and China Southern all have 24 apiece, while Norwegian has 18. If those airlines face bills of a similar scale, the total cost of the 737 Max groundings could run into billions.
Airlines will seek to recover the money they are having to spend because they cannot fly their jets, and from what’s known so far about the crashes, some sort of action against Boeing may be one of the options.
As with all crash investigations, certainty about the reasons for the loss of the two Boeing jets will take some time. However, attention has focused on a system in the 737 Max that Boeing fitted to make it handle like earlier versions of the jet, cutting pilot training time.
If – and that is a big if – this system is proved to be the cause of the crashes, Boeing could potentially find itself on the hook.
The fact that Boeing is still churning out 737s at a monthly rate of more than 50 is another issue. Not all are the latest Max version, but these aircraft are still stacking up, creating a headache for the company that is not just in the space they occupy at its Renton plant near Seattle.
The $121m (£93m) jets could also be creating cashflow issues. In the aviation world, customers pay only a fraction of the price to place an order, and hand over the bulk of the price when they fly the plane away.
Analysts point out that the problems with the 737 Max are in no way likely to cause the company to collapse. Last year it had revenues of $101bn and profits of $12bn – from civil, military and space sectors – and it generates large amounts of cash, giving it deep pockets. Not only that, Boeing is simply too big to fail. It is the world’s largest aerospace business with more than 150,000 staff, and an American icon that also happens to be its largest exporter making it crucial to the US economy, not to mention its national security.
But while Boeing – and the airlines – struggle to deal with the fallout from the grounding, there are some who are making money.
Most notable are aircraft leasing companies who will happily supply aircraft complete with crew and maintenance – a service known as “wet-leasing” – for a healthy fee.
With about 21,500 passenger and cargo aircraft in service worldwide according to Airbus’s latest market forecast, 400 737 Maxs going out of service makes a big dent in capacity. This squeeze is exacerbated by troubles with Rollsroyce’s Trent 1000 engines for Boeing’s larger 787 airliners, which has grounded some of the 300 or so affected aircraft while repairs are carried out. (Rolls says that sorting out the Trent 1000 problems will cost it £1.5bn.) This makes leasing aircraft an attractive market at the moment, according to airline analyst John Strickland of JLS Consultancy.
“In aircraft leasing, I think prices have gone up because there’s more demand in the market with almost 400 737 Maxs out,” he said. “The lessors are very smart and make good money out of other people’s problems.”
Other winners are companies that supply components. With new 737 Maxs not joining the worldwide fleet, older aircraft that require more maintenance and parts are being kept in service longer.
If the situation is not rectified soon, growing demand for air travel could even see older aircraft in storage being dusted off and brought back into service.