Bloomberg: MAX-Related Payments Higher Than Projected

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The deal between Turkish Airlines and Boeing suggest that customer compensation-related costs related to the MAX grounding are trending significantly higher than initial estimates, Bloomberg analysts said.
Credit: Credit: Boeing

The deal between Turkish Airlines and Boeing suggest that customer compensation-related costs related to the MAX grounding are trending significantly higher than initial estimates, Bloomberg analysts said.

Turkish recently told its country’s stock exchange that its deal with Boeing is valued at $225 million, without providing details. Turkey’s Hürriyet newspaper reported that spare parts and training make up $75 million of the deal. Turkish had 12 MAXs when the fleet was grounded in mid-March 2019 and was slated to take delivery of 35 more by year-end 2019.

“Turkish Air’s reimbursement appears to be about $14.3 million per plane per year, including all costs, or $9.6 million an aircraft a year for cash costs,” Bloomberg wrote in an analyst note. “These costs are considerably greater than our previous expectations of $4.5 million an aircraft per year,”Bloomberg said—based largely on Boeing’s partial settlement with Southwest Airlines for $125 million.

“Our initial analysis was based purely on lost profit at Southwest, using 2018 as a base case,” Bloomberg added. “Higher reimbursement likely represents pursuit of both lost profit and increased costs due to the grounding.”

Boeing has taken a $5.6 billion charge for customer-related compensation, which it expects to be a mix of cash payments, discounts on services, and other non-cash considerations. The company’s assumptions included regulatory approval for return-to-service in 2019. With the time line now pushing into 2020, its costs will rise, and it expects to provide more details when it releases its 2019 fourth-quarter earnings on Jan. 29.

While Boeing’s charge was not considered final, the initial settlements suggest it will pay more than initially expected, even factoring out the extended grounding. But Bloomberg cautions that compensation is expected to vary on a per-customer basis, based on each carrier’s profitability and the related lost revenue from not having its MAXs.

“Airlines with the highest operating margins or largest backlogs will likely get the best remuneration,” Bloomberg said. “Turkish Airlines’ operating margin of 10.8% exceeds the average of 7.2% for the airlines with the largest backlogs.”

Lessors are likely in line for even less on a per-aircraft basis. “Even at a $300,000-a-month lease rate for a 737, a level we think is slightly above market, the loss in total revenue is only $3.6 million without accounting for costs,” Bloomberg said.

The Turkish deal provides some good news for Boeing’s balance sheet, as it supports the company’s assumption that not all of the MAX compensation will be in cash. But discounting spares and services will create long-term headwinds.

“We expect such arrangements to hurt Boeing’s revenue and profit potential, likely for years,” Bloomberg said. “Previously, Boeing could charge for this training or spare-parts sales. For some of these considerations, the margins are quite large.”

Boeing’s Global Services segment posted a 14.8% operating margin in 2018, out-pacing its Commercial and Defense and Space businesses and was on pace for a similar figure through three quarters in 2019.

The MAX remains grounded while Boeing and regulators review changes to the model following two fatal accidents in five months. The FAA, which will be the first to lift its MAX operations ban, is not working under a prescribed time line for approving Boeing’s changes. The longer the MAX remains grounded, the more Boeing will have to compensate operators. Still to be determined: the cost ramifications of returning the aircraft to service, including any training-related expenses that airlines will incur. These could spike if simulator sessions are mandated as a precursor to returning MAXs to airline schedules. The FAA and other regulators are still evaluating proposed changes to MAX training.

Sean Broderick

Senior Air Transport & Safety Editor Sean Broderick covers aviation safety, MRO, and the airline business from Aviation Week Network's Washington, D.C. office.