Indonesia’s national airline made waves Friday when it unveiled plans to cancel its nearly $5 billion order for 49 of Boeing’s grounded 737 MAX aircraft.
But analysts and industry insiders say aircraft contracts are extremely hard to break — and they suspect that Garuda Indonesia and other airlines may be trying to use the controversy over two fatal MAX crashes to push Boeing for better terms for the costly aircraft.
On Friday, Garuda Indonesia said it informed Boeing earlier this month it wants to cancel the orders, placed back in 2014, because of passengers’ concerns. “Our passengers have lost confidence to fly with the MAX 8,” a Garuda spokesperson told CNN, referring to the Lion Air and Ethiopian Airlines crashes on Oct. 29 and March 12 that left 346 people dead.
The spokesman added that airline will meet with Boeing to discuss the matter next Thursday, March 28. Boeing declined to comment on the report, and the airline did not respond to a request for an interview.
The Garuda news has revived concerns that Boeing might see a wave of cancellations before it can fix a flawed control system that has come under scrutiny in both crashes and which led to the grounding of the 737 MAX fleet.
And, indeed, other airlines have threatened or at least talked about cancellations. After October’s Lion Air crash, that airline — one of the largest MAX customers — threatened to cancel its 187 remaining MAX orders. Last week, Malaysia Airlines announced that it was reviewing its orders for 25 MAX aircraft.
But some industry experts downplayed the impact of the cancellation talk.
Going strictly by the numbers, Garuda’s 49 orders represent barely 1 percent of Boeing’s total backlog for the 737 MAX, which currently stands at 4,668 orders, according to the Boeing website.
“This doesn’t even rise to ‘pocket change’ for Boeing,” Scott Hamilton, the Bainbridge Island-based aviation consultant who publishes Leeham News and Analysis, tweeted Friday morning. “Let’s put thing[s] in perspective amid all the talk of CXLs,” or cancellations. Boeing’s share price was down 2.8 percent Friday.
Further, aircraft cancellations require more than an announcement in the media. Although the specific terms of Garuda’s sales contract with Boeing aren’t public, an outright cancellation would likely be prohibitively expensive for the airline.
In most contracts, said Hamilton, airlines pay a hefty deposit for each aircraft ordered as well as “progress” payments as each aircraft moves through the assembly process.
“The Boeing contracts are very extensive,” adds Steve Rimmer, CEO of Issaquah-based Altavair, an aircraft leasing and financing firm. Although contracts typically afford buyers some compensation if aircraft deliveries are delayed, they’re unlikely to include “the right to terminate” simply because an aircraft type has been grounded for a short period.
“It’s not as straightforward as that,” Rimmer said, although a longer grounding could complicate the question.
As important, industry observers say, the cancellation threats can’t be separated from the fact that the airlines in question are often struggling financially and may view the MAX controversy as an opportunity to pare back orders of the aircraft, which can cost as much as $50 million each. “Garuda is historically a perpetual financially distressed airline,” Hamilton said.
Ahmed Abdelghany, an aviation-industry expert at Embry-Riddle Aeronautical University, said cancellation threats might also be a negotiating tactic to persuade Boeing to give the airline better terms, for example by deferring orders. “Think about it — I can call my supplier and cancel an order and most likely, the supplier will come back with a counteroffer,” said Abdelghany.
A case in point may be Norwegian Air, another large 737 MAX customer that is also on thin ice financially, which announced that it would demand compensation from Boeing over MAX delays. “You’ve got to look at the background of each airline, and what they might want to achieve” with possible cancellation threats, Rimmer said.
Further, even some financially healthy airlines might now be wishing to reduce their 737 MAX orders. Some haven’t seen the growth they expected when they placed the orders, Rimmer said. For others, the economics of the fuel-efficient but expensive 737 MAX aren’t as attractive in today’s environment of relatively cheap aviation fuel.
Both the MAX and its competitor, the Airbus A320neo, “were pitched at a time when oil was over $100 a barrel, and therefore, their fuel efficiency was a great savings,” Rimmer said. “It’s not as great today.”
Instead, Rimmer said, airlines may be tempted to opt for older aircraft, such as the 737-800, which isn’t as fuel efficient as the 737 MAX but costs far less. In such circumstances, Rimmer said, it’s not surprising that the trade press has been full of speculation about airlines and leasing companies “using this opportunity to downsize orders because they’ve over-ordered.”
Still, industry observers don’t expect to see a wave of actual cancellations.
Beyond the contractual constraints, most airlines will be reluctant to take action that could damage their relationship with one of only two major aircraft manufacturers, said Embry-Riddle’s Abdelghany. While a cancellation might bring short-term economic savings, airlines also know such a decision could come back to haunt them several years from now “when the economy is coming back and I need more aircraft.”
Boeing is highly experienced when it comes to soothing skittish buyers. When airlines retrenched during the Great Recession, both Boeing and Airbus used deferrals and other arrangements to persuade airlines to keep orders from evaporating. Boeing did the same when the 787 Dreamliner was grounded by overheating batteries — leveraging its longstanding relationships with airlines to preserve existing orders.
“That relationship card is huge,” said Rimmer. “And I fully expect that Boeing’s top management is going to be out there, talking with the airlines directly.”