- Garuda Indonesia is the first airline to attempt to cancel its order for Boeing’s 737 Max 8 aircraft, a decision the airline announced on Friday.
- But other airlines won’t necessarily follow Garuda’s lead in canceling 737 Max 8 orders, according to the aviation analysts Henry Harteveldt and George Hamlin.
- The decision to cancel an aircraft order is a difficult one, because of Boeing’s and Airbus’ dominance in the market for large commercial aircraft, as well as the series of investments and decisions airlines make when they order an aircraft.
Garuda Indonesia is the first airline to attempt to cancel its order for Boeing’s 737 Max 8 aircraft, a decision the airline announced on Friday.
Garuda said Indonesian travelers no longer trusted the aircraft that was involved in two deadly crashes in five months: the Lion Air flight that crashed in October, killing all 189 people on board, and the Ethiopian Airlines flight that crashed earlier this month, killing all 157 people on board.
Garuda wants to replace some 737 Max orders with larger Boeing aircraft, The Wall Street Journal reported.
The stakes are high for Boeing and the United States’ economy, as the aerospace manufacturer is the US’s largest exporter. Disruptions to 737 Max production could drag on gross domestic product, JPMorgan said in a note to clients on Friday.
If 737 Max production stops, “it would take about 0.15% off the level of GDP, or about 0.6%-point off the quarterly annualized growth rate of GDP in the quarter in which production is stopped,” the bank said.
But other airlines won’t necessarily follow Garuda’s lead in canceling 737 Max 8 orders. Airlines have not stopped financing 737 Max aircraft that have yet to be delivered, and valuations of the aircraft are the same as before they were grounded in much of the world this month, according to The Journal.
Order revisions are more likely than cancellations
If airlines do try to change the terms of their orders, they’re more likely to reduce their size or renegotiate them rather than cancel them entirely, the aviation analysts Henry Harteveldt and George Hamlin told Business Insider.
The context of Garuda’s decision is important to consider, said Harteveldt, the founder of the travel-research company Atmosphere Research Group. Garuda is the national airline of Indonesia, the site of the Lion Air crash, meaning “there is a heightened awareness” of the Ethiopian Airlines crash there now, Harteveldt said.
And the decision to cancel an aircraft order is a difficult one. Boeing and Airbus dominate the market for large commercial aircraft, and both have order backlogs, said Hamlin, the president of Hamlin Transportation Consulting.
“Right now, if you cancel your Max order, what are you going to substitute for? Airbus would love to have more business and to take customers from Boeing, but the A320 family and the 737 line are sold out for years into the future,” he said. “You could probably find the occasional airplane, but switching a whole large fleet order would be quite difficult.”
Moving from Boeing to Airbus aircraft could be particularly challenging, since Airbus has less production capacity than Boeing, Harteveldt said.
Canceling an aircraft order is difficult
Beyond capacity constraints, airlines make a series of investments and decisions when they order an aircraft – like training employees, buying the equipment and parts necessary for maintenance, and designing a schedule based on the plane’s capabilities – that can be difficult to untangle.
“As an airline, when you commit to an airplane, it’s like getting married in a place where divorce is very difficult,” Harteveldt said.
Airlines that have already received the 737 Max 8 face another set of questions, as the plane has been grounded in many countries while investigators work to determine what caused the two recent crashes. American Airlines said on Sunday that it was canceling about 90 flights a day because of the 737 Max grounding and extended the cancellations through April 24.
Boeing could end up compensating airlines for lost revenue opportunities while the 737 Max 8 is grounded, Hamlin said. Norwegian Air has already requested that Boeing do so.
A Boeing representative said the company does not comment on conversations with its customers.
The Lion Air and Ethiopian Airlines crashes have put Boeing under intense scrutiny. CNN reported on Thursday that the Department of Justice had subpoenaed Boeing as part of a criminal investigation into the certification and marketing processes for the 737 Max aircraft.
The investigation reportedly concerns the process Boeing used to determine whether its 737 Max planes were safe for flight and the data it gave to the Federal Aviation Administration about that process. Investigators have asked for information from Boeing about the company’s pilot-training manuals and marketing for the 737 Max aircraft, according to the CNN report.
A Boeing representative said the company does not comment on legal matters, and the DOJ and the FBI did not respond to Business Insider’s requests for comment.
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- Read more:
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- DOJ has reportedly subpoenaed Boeing as part of a criminal investigation involving the 737 Max
- Boeing quietly unveiled the $442 million airliner that will replace the 747 jumbo jet
- Europe and Canada are investigating the Boeing 737 Max themselves rather than trusting the US – another apparent snub of American regulators