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)
Copyright (c) 2019 Dow Jones & Company, Inc.
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