BA Boeing Co

By Robert Wall, Doug Cameron and Ben Otto 

PT Garuda Indonesia on Friday became the first airline to pursue canceling its Boeing Co. 737 MAX jet order as other carriers move to limit damage to their flight plans and finances. Airlines are grappling with the likelihood of a protracted global grounding following two fatal crashes.

Garuda said passengers have lost confidence in the MAX after the aircraft model was involved in two crashes within five months that killed a combined 346 passengers and crew in Indonesia and Ethiopia.

Regulators last week idled the global fleet of more than 370 MAX planes. Boeing maintains the plane is safe but has promised changes to a flight-control system investigators believe may have been involved in the two accidents.

Some other customers, such as Vietnam's VietJet, have said they are studying future purchases because of the fallout from the grounding. "We think other cancellations may follow as global customers remain spooked after two crashes with seemingly similar causes," CFRA Research analyst Jim Corridore said in a note.

Loss-making Garuda operated one 737 MAX but had already deferred the delivery of the remaining 49 in its order, with the next several jets due to arrive in 2020 and the remainder spread out through 2030, according to regulatory filings.

Boeing representatives are planning to meet with Garuda in Jakarta on March 28 to discuss the matter further, a Garuda spokesman said, adding that the airline wanted to convert some of the MAX order into larger planes. Boeing declined to comment.

Airline analysts said negative customer sentiment toward the plane may run higher in Indonesia because the first MAX crash -- involving a Lion Air jet in October -- occurred in that country.

Airlines around the world that use the MAX or have placed orders for the aircraft are facing rising pressure. They are rushing to adjust their schedules and find alternative aircraft heading into the crucial summer flying season, when they earn the bulk of their annual profits. With regulatory scrutiny increasing and no clear indication of when the grounded jets might fly again, carriers are also preparing for months rather than weeks without the MAX.

United Continental Holdings Inc. has removed its 14 MAX jets from schedules until June. It said last week that the financial impact so far has been limited but could grow if the grounding stretches into the summer.

Air Canada said this week it was accelerating introduction of some used A321 single-aisle jets made by Airbus SE that were previously operated by another airline. It now doesn't expect to operate the MAX before July. Poland's LOT said it had to rent four planes to replace its five idled MAX aircraft. Air Italy is renting an extra plane from another European carrier to replace a grounded MAX. Other carriers said they are waiting for further developments before deciding what to do.

The MAX represent only a fraction of the global airline fleet, although upwards of another 500 are due for delivery by year-end to open new routes and replace older, less efficient planes.

Boeing has a seven-year backlog of more than 4,600 MAX jets and said this week that jetliner demand continues to outstrip supply. Airlines are continuing to finance future MAX deliveries, and valuations of the plane haven't changed since the grounding, aircraft financiers said.

At Garuda, a new management team installed in September has been reviewing changes to its fleet of around 140 jets, including Boeing 737-800s, 777-300ERs and Airbus A330s used on longer routes than the MAX, financiers said. Garuda Chief Executive I Gusti Ngurah Askhara Danadiputra told The Wall Street Journal the airline sent a letter to Boeing Commercial Airplanes CEO Kevin McAllister to say that it wanted to cancel its MAX order.

Cancellations aren't easy to pull off, typically requiring airlines to forego their deposits, which are usually about 5% of the purchase price, as well as progress payments made up to two years ahead of delivery. Between 40% and 60% of the price is paid at delivery, financiers said. It wasn't immediately clear if the global grounding gave Garuda a penalty-free out.

The grounding also adds financial pressure to airlines that rent their MAX aircraft because they still have to make payments averaging $300,000 a month on the jets, said aircraft lessors. Those that have bought the planes still need to make loan payments. Carriers also have to cover storage costs.

Additionally, airlines may not have much leverage in switching between types of planes because there are only two major manufacturers of large, single-aisle jets. Airbus also has a big backlog of orders for its rival A320neo, limiting any upside from the MAX grounding.

"Airbus is pretty much sold out on the A320neo family until 2024," Citigroup analyst Charles Armitage said.

The total cost of the groundings is still unclear, but reshuffling passengers and planes is likely to hit airline finances, analysts say. Air Canada and rival WestJet have suspended their financial guidance for the year in a sign airlines are unsure of the financial impact.

While carriers including Norwegian Air Shuttle A/S have said they would seek compensation from Boeing, aircraft financiers said customers have limited recourse. Aircraft warranties typically only cover repairs and fixes -- not lost revenue -- and most carriers awaiting new planes would only receive compensation if deliveries are delayed for a year or more.

Boeing expects the return to flight to come much sooner than some airlines fear. Commercial plane marketing vice president Randy Tinseth said Thursday that the company's planned changes to the 737 MAX software and training are expected to be approved by U.S. regulators within weeks. Last week, Acting Federal Aviation Administration chief Daniel Elwell told reporters he expected the planes to restart carrying U.S. passengers in several months.

U.S. airlines said the grounding is prompting the type of juggling they would do during a winter storm or a hurricane. Southwest Airlines Co. said it has been cancelling 130 to 160 flights out of 4,000 daily services, making cancellations five days out to give customers as much notice as possible. The airline said it hasn't come up with a contingency plan for longer-term storage of the planes, most of which are at maintenance facilities.

American Airlines Group Inc., which parked its 24 MAX jets at hub airports and maintenance bases, said it has been cancelling around 85 daily flights throughout its network, pulling aircraft from routes with multiple flights a day to fly to cities with less frequent service.

Passengers face more one-stop flights as airlines adjust their schedules, while replacement planes rented from other airlines may have different onboard amenities.

"Customers are the biggest losers," said Helane Becker, airline analyst at Cowen & Co.

--Alison Sider contributed to this article.

Write to Robert Wall at robert.wall@wsj.com, Doug Cameron at doug.cameron@wsj.com and Ben Otto at ben.otto@wsj.com

(END) Dow Jones Newswires

March 22, 2019 14:54 ET (18:54 GMT)

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