Boe­ing could weather loss of Lion Air or­der

Threat­ened ac­tion by the In­done­sian car­rier would have lit­tle ef­fect, an­a­lysts say.

Los Angeles Times - - BUSINESS BEAT - By Saman­tha Ma­sunaga saman­tha.ma­[email protected]­times.com Twitter: @sma­sunaga

Even if In­done­sian air­line Lion Air de­cides to can­cel its or­der of al­most 200 Boe­ing 737 air­craft, as re­ported Wed­nes­day, the move would not deal a death­blow to Boe­ing Co.’s line of pop­u­lar nar­row-body air­planes, an­a­lysts said.

Lion Air’s founder told Bloomberg on Wed­nes­day that he was “pre­par­ing doc­u­ments to pro­pose can­cel­la­tions,” say­ing he felt “be­trayed” by the Chicago aero­space giant’s sug­ges­tion that the In­done­sian car­rier was to blame for the Oc­to­ber crash of a new Boe­ing 737 Max air­craft that killed all 189 peo­ple on board.

In a state­ment, Boe­ing called Lion Air a “val­ued cus­tomer.”

A pre­lim­i­nary re­port late last month from In­done­sian au­thor­i­ties found that the pi­lots had strug­gled to con­trol the air­craft as an au­to­mated flight con­trol safety sys­tem re­peat­edly pushed the plane’s nose down­ward.

Lion Air is a ma­jor player in the grow­ing South­east Asia mar­ket and or­dered a large num­ber of 737s, but an­a­lysts said other air­lines are un­likely to fol­low its lead.

The back­log of al­most 4,700 or­ders for the 737 Max shows the plane’s con­tin­ued im­por­tance to Boe­ing’s growth plans. The 737 Max — a more fuel-ef­fi­cient, fourth-gen­er­a­tion ver­sion of the 737 nar­row-body line — is a “cash cow” for the com­pany, said Scott Hamil­ton, man­ag­ing di­rec­tor of avi­a­tion con­sul­tancy firm Lee­ham Co.

Lion Air’s or­ders make up about 4% to 5% of that back­log, an­a­lysts es­ti­mated.

Boe­ing pro­duces 737s at a rate of 52 per month and de­liv­ered 407 of them in the first nine months of this year, ac­cord­ing to Boe­ing’s earn­ings re­port for the three-month pe­riod that ended Sept. 30.

The 737 and the 777 “car­ried Boe­ing through all the tough times” with de­lays in the com­pany’s wide-bod­ied 787 air­craft, Hamil­ton said.

“It’s not a death­blow if th­ese get can­celed for Boe­ing be­cause they have so many 737 or­ders on the books right now,” said Chris Hig­gins, se­nior eq­uity an­a­lyst at Morn­ingstar.

A can­cel­la­tion from Lion Air would not tar­nish the 737 Max im­age as much as if that man­date came from, say, Southwest, which is bet­ter known glob­ally, Hig­gins said.

In a note to clients Wed­nes­day, JPMor­gan Chase an­a­lyst Seth Seif­man said he ex­pected “min­i­mal fi­nan­cial im­pact” to Boe­ing with re­gard to the Lion Air crash. While the po­ten­tial Lion Air can­cel­la­tion was “some­thing to watch,” he wrote that it was “far from clear” whether the air­line would fol­low through.

“More im­por­tant to us is that global air­lines con­tinue tak­ing de­liv­ery of MAXs and fly­ing pas­sen­gers on them daily,” Seif­man wrote.

Boe­ing could even see a silver lin­ing from such a can­cel­la­tion by of­fer­ing those de­liv­ery po­si­tions to other car­ri­ers, which could speed a 737 to cus­tomers faster than Air­bus A320s are be­ing de­liv­ered, Hamil­ton said.

“Boe­ing could help pro­tect its mar­ket share by of­fer­ing th­ese de­liv­ery spots up to some­one else, and they would re­duce ex­po­sure to dicey credit,” he said.

Lion Air plans to ex­pand in South­east Asia, which is seen as the big­gest growth mar­ket for the next 20 years. About 10% of the back­log for Air­bus and Boe­ing or­ders of air­craft with 130 or more seat­sare for South­east Asia, Hig­gins said.

“It’s re­ally been a high­growth area in terms of air travel de­mand be­cause of eco­nomic growth go­ing on there, more peo­ple mov­ing into the mid­dle class and the fact that there’s lim­ited travel op­tions,” he said.

On Wed­nes­day, both Southwest Air­lines and Amer­i­can Air­lines — two of the three U.S. car­ri­ers that fly the 737 Max — said they had no plans to can­cel their or­ders. United Air­lines did not have an im­me­di­ate re­sponse to a re­quest for com­ment.

The rea­son is the lack of safety con­cerns about the ac­tual air­craft, an­a­lysts said.

The pre­lim­i­nary crash re­port did not pin­point the cause of the ac­ci­dent but de­scribed how pi­lots han­dled warn­ings from the so-called Ma­neu­ver­ing Char­ac­ter­is­tics Aug­men­ta­tion Sys­tem and rec­om­mended Lion Air im­prove its safety cul­ture, ac­cord­ing to Bloomberg. That sys­tem is in­tended to as­sist pi­lots by au­to­mat­i­cally push­ing the air­craft’s nose down­ward in an­tic­i­pa­tion of a stall.

“The air­plane is safe to fly when you know what to do if a prob­lem comes up,” Hamil­ton said. “There’s noth­ing wrong with the air­plane. It’s a mat­ter of know­ing about this new sys­tem and know­ing what to do if some sort of anom­aly ap­pears.”

The Al­lied Pi­lots Assn., which rep­re­sents Amer­i­can Air­lines pi­lots, and the union rep­re­sent­ing Southwest pi­lots have said flight man­u­als for the 737 Max air­craft did not have an ex­pla­na­tion of the MCAS fea­ture im­pli­cated in the crash.

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