Lion Air threatens to cancel MAX order; no impact to Boeing seen

Control problems

Pilots reported control problems immediately after take-off.

Preliminary information derived from the black box indicated that fault readings from a sensor cause a staff protection system to push the nose of the airplane down as pilots fought to level the airplane 26 times before the crash.

The system, with the acronym MCAS, is new to the MAX. It’s a modification of a system that’s been on 737s for 20 years. Lion Air (as well as other airlines, including American and Southwest in the USA) says Boeing didn’t highlight the modification in the pilot training manual.

The pilots of the doomed JT610 flight apparently weren’t aware of the change and that simply using a technique to disable a runaway trim for the old system would have solved the issue. (Pilots of the same airplane the day before, encountering the same problem, disabled MCAS.)

The cockpit voice recorder hasn’t been recovered, so nobody knows what was going on in the cockpit between the pilots as they tried to figure out what was wrong.

But after investigators issued a report outlining what was found on the flight data recorder, Boeing issued a statement ignoring the pilot manual omission and, by any objective reading, blaming the pilots and Lion Air’s maintenance for the crash.

It remains to be seen if Lion Air is partially, or entirely culpable, or not at all, or Boeing’s role in this accident. But Boeing’s statement led Kirana to express his offense and determination to cancel what’s left of the Lion Air order for the MAX. Boeing’s web site lists 190 undelivered at Nov. 30.

The Ascend data base listed 229 MAXes scheduled for delivery from 2019 through 2026. Under new accounting rules, some of the order is attributed to lessors who will finance the aircraft through purchase-leaseback arrangements.

Rapid growth

Lion Air is embarked on a rapid growth plan, fueled by the large order for the MAX. Some of these will replace 737NGs as these roll off lease or maintenance holidays.

Kirana said the growth plan will continue even if the MAX order is canceled. He pointed to Airbus and Bombardier (apparently referring to the CSeries, which is now the Airbus A220) as alternatives to Boeing.

Lion Air has 148 A320neos scheduled for delivery from 2019 through 2031. These are thought to be intended for Lion Air’s leasing arm, but most airplanes probably can be redirected to Lion Air.

The delivery stream is broadly a mismatch to the MAX.

But last week the head of Avianca Airlines said he wants to cancel 50 of 100 A320neo orders. There is no way for an outsider like LNC to know which 50 Avianca wants to cancel. But plotting its delivery stream against the MAX and Lion Air’s orders, it appears that for the most part, the combined Lion-Avianca delivery streams can replace the MAX fairly evenly.

Canceling the MAX

Boeing CEO Dennis Muilenburg pointed out, when asked, that the contract has provisions that prevent (or nearly so) one-sided cancellations.

It’s not clear what penalties Lion Air might face. It’s been speculated that orders for years beyond the next 24 months may have only minimal deposits.

Cancellation of aircraft within the next 18-24 months would likely involve significant penalties because orders to suppliers already have been placed. This means about another two dozens MAXes should be delivered to Lion Air.

Some believe that Lion Air is overcommitted with too ambitious a business plan. Canceling or deferring the MAX may be the best course irrespective of the accident, some believe.

Lion Air’s financials are private, so it’s not possible to assess the company’s financial condition.

Impact to Boeing

Some looked at the quantity of orders that Lion Air might cancel and concluded this would be a big blow to Boeing.

LNC takes a different view.

While agreeing that Boeing clearly would not want to lose an order for 202 MAXes (2021-2026 deliveries), valued at $11bn (an average price of $50m per plane, given a mix of MAX 8/9/10), LNC believes Boeing could resell these. It could even obtain a higher price.

But when the delivery stream is plotted out against announced and future production (the latter an LNC forecast), the annual impact of cancellation—even if the orders went away and were not resold, an unlikely prospect—is less than 6%.

LNC sees no impact to Boeing, other than a PR black eye, if Lion Air cancels its order. It could even gain by reselling the aircraft at a higher price.

Boeing isn’t in a position of weakness. But neither is it an enviable position to be in.

 

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