Airlines and leasing companies were trying to promote competition amongst aircraft manufacturers before the sector further consolidated with Airbus buying Bombardier’s C Series and Boeing proposing a majority stake in Embraer’s commercial division. That firmly leaves the aircraft pipeline, excluding the long-term emergence of China and Russia, to an Airbus-Boeing duopoly.
It is a calculated risk for a 737 MAX buyer to sue Boeing. No matter how right the purchaser is found to be, it risks infuriating Boeing in a best case scenario. Worse is the lawsuit against Boeing from Dublin-based lessor Timaero Ireland Ltd., a subsidiary of Russia’s state-owned VEB Leasing JSC.
Timaero claimed to the federal court in Chicago this month that Boeing in this 737 MAX crisis was motivated by greed, knowingly committed fraud, has “rendered the aircraft worthless,” and “the public has lost complete confidence in the safety of the 737 MAX.”
Besides seeking $185 million in damages for its order book of 22 MAXs, Timaero asks for unspecified compensation for lost profit, and for punitive damages to be calculated at three times the amount of compensatory damages.
Timaero also wants its contract with Boeing cancelled. Airbus, knowing it is the only alternative, might not have to price so aggressively. Loss of negotiating leverage on future aircraft orders is not the sole downside for 737 MAX buyers considering legal action against Boeing. They worry about the Boeing aircraft they already operate and which will need the airframer’s support for years and potentially decades to come.
Some concerns: Boeing support not covered under contract may not eventuate, or be given at a high price. This covers not just engineering work but also other areas including regulatory, legal and if the aircraft changes owner. Previously contracted support may be provided at the minimal level of service while taking the maximum length of time permitted.
The sector is paying more attention to aftermarket support with a flurry of activity, including Boeing in 2017 establishing its own aftermarket division, Boeing Global Services, which aims to grow revenue from $14.6 billion to $50 billion within a decade. Boeing Global Services CEO Stan Deal was made CEO of Boeing Commercial Airplanes in October, replacing Kevin McAllister.
Airlines ranging in size from Southwest to Icelandair have reached compensation agreements with Boeing. There are reports numerous airlines and lessors are unhappy with Boeing offering minimal compensation, preferring to give a discount on future orders rather than upfront cash, and that Boeing is discouraging lawsuits with the quip that only lawyers win. Turkey’s Demirören said Turkish Airlines was preparing a lawsuit.
Timaero makes statements Boeing has already agreed with or which could be fair. But there are also sweeping views Boeing may find contentious. Rather than the lawsuit be a formula for more MAX buyers suing Boeing, Timaero may be an outlier due to its unique commercial situation.
There is a view lessors over-ordered aircraft at the peak of the recent cycle and were eager to reduce their backlog prior to the MAX crisis. Timaero has further challenges. Parent owner VEB in 2014 placed an order for 20 MAXs, which it planned to lease to Transaero, the Russian airline that went out business in 2015. That left VEB exposed to the 20 MAXs and an order for 20 Airbus A320neos that VEB also planned to lease to Transaero. VEB increased its MAX order to 22 in 2016 by converting two 737 NGs to MAXs. Russian media say VEB made pre-delivery payments, at least 10% of contract price, on all 42 aircraft.
Timaero has received only two MAXs, at least one of which is leased to Eastar Jet in Korea via VEB. Eastar has encountered financial problems from the MAX grounding as well as the wider changes in the Korean market as a result of a downturn in travel to Japan and weaker consumer sentiment from the strengthening Korean won. Rival Jeju Air agreed in December to buy 51% of Eastar.
Timaero may be willing and able to cancel its MAX order, recoup pre-delivery payments and perhaps other costs. But other lessors as well as airlines need to receive the best outcome while continuing to have competition between Airbus and Boeing.
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