Indonesia′s Garuda to scrap Boeing 737 MAX order | Business| Economy and finance news from a German perspective | DW | 22.03.2019
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Indonesia's Garuda to scrap Boeing 737 MAX order

The Indonesian flag carrier is the first airline to publicly confirm plans to cancel an order for the model involved in two fatal crashes. The move could spark more cancellations from other major carriers.

Indonesia's national carrier Garuda Indonesia has asked Boeing to cancel its multibillion-dollar order for 49 737 MAX jets after the plane was involved in two fatal crashes in less than five months.

The move, which could prompt other major carriers to follow suit, comes even as investigators are yet to prove a direct link between the recent Ethiopian Airlines crash that killed all 157 people on board and last October's Lion Air disaster in the Java Sea, which killed 189 people.

But investigators say the circumstances of both the crashes have "clear similarities."

The Indonesian flag carrier has told Boeing that its passengers had lost confidence in the aircraft.

"We have sent a letter to Boeing requesting that the order be canceled," Garuda spokesman Ikhsan Rosan said.

"The reason is that Garuda passengers in Indonesia have lost trust and no longer have confidence in the plane," he said.

Garuda placed an order worth $4.9 billion (€4.3 billion) for 50 MAX planes in 2014 and has already taken delivery of one of the jets.

Boeing officials will visit Indonesia next week to discuss Garuda's plans to scrap the order, Rosan told AFP news agency.

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Expensive ordeal

Boeing is facing increased pressure to dispel safety concerns about the plane — the aerospace giant's best-selling aircraft — which has been grounded by regulators globally in the wake of the Ethiopian Airlines crash.

The company and the US Federal Aviation Administration are expected to be questioned by US lawmakers. Boeing, which has temporarily halted deliveries of the MAX jets, also faces a criminal probe by the US Justice Department, several lawsuits filed on behalf of the victims of the crashes and demand for compensation by airlines.

"This will be expensive.  All told, this could easily cost Boeing a billion dollars," Teal Group aviation analyst Richard Aboulafia told DW.  "Of course, the company earned around $10 billion last year, so while this is a tragic and expensive event, it's hardly a threat to the company's future."

Rob Morris, the head of consultancy at Ascend Flightglobal, estimates a loss of cash flow related to production delays to Boeing and its supply chain in the order of $2.5 billion for each full month of lost deliveries.

Boeing is working on a software update to the fleet. The software changes among other things will mandate a previously optional cockpit warning light on MAX jets, Reuters news agency reported. The feature might have warned of problems that possibly played a role in the recent crashes.

Boeing will also retrofit older planes with the cockpit warning light, the news agency reported, citing two officials briefed on the matter.

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Boeing tries to correct 737 Max nosedive

Following Garuda's move

The single-aisle 737 MAX, first delivered in May 2017, has been Boeing's best-selling plane ever, with more than 350 planes registered and close to 5,000 on order. The MAX program is critical to the company. It represents nearly 80 percent of Boeing's commercial aircraft order backlog and nearly 60 percent by value.

Boeing has so far stressed that it will continue to build the planes and that it has no plans to slow production in response to the crashes.

That despite some airlines indicating that they could cancel their 737 MAX orders. Asian carrier Vietjet, which has 200 MAXs on order valued at about $25 billion, has said it will take a call on its order based on the outcome of the probe. Kenya Airways is also said to be weighing its 737 MAX order.

Lion Air may drop its $22 billion order for the Boeing plane, Bloomberg reported earlier in the month.

"Given that there are almost 100 airline and leasing customers with firm backlog for Max aircraft today, it would not be surprising if there were others with similar reservations today," Morris told DW. "However, many will be waiting to see how the situation develops before making knee-jerk reactions to this difficult and not yet fully understood situation."

Watch video 01:10

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Is switching to Airbus an option?

Bloomberg reported that Kenya Airways and Lion Air were considering a switch to rival plane maker Airbus.

Boeing and the European plane maker vie for the top spot in the jetliner industry. Boeing launched 737 MAX planes in response to Airbus' fuel efficient single-aisle A320 Neo jets.

The two plane makers have their hands full when it comes to orders for the two jets, with combined orders in excess of 11,500. Both companies have struggled to increase production rates due to supply chain constraints.

Last year, Airbus delivered just 386 neo series jets, while Boeing delivered 256 MAXs.

Ditching Boeing for its rival will not be simple process for airlines amid such constraints.

"An airline may want to cancel, but it would be years before Airbus could fill their orders, and until then they would be at a serious disadvantage against competitors while they operate older jets that burn more fuel," Aboulafia said.

Morris says there may be some aircraft ordered by operating lessors still potentially available in 2020 and 2021 but these slots will be limited.

"If the MAX grounding becomes prolonged then these slots will potentially become increasingly sought-after," Morris said.

There is also a considerable cost to airlines to switch to aircraft types which are not presently in their fleet, including the cost of training and technical fixes.

"This cost can often be as much as $100 million, depending on the size of the airline and their fleets," Morris said. " So it is not simple for airlines to switch their fleet."

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