Boeing customer compensation for MAX already at $1bn and climbing, estimates aviation lawyer

May 2, 2019, © Leeham News, New York: Boeing faces huge claims from airlines with grounded 737 MAXes, the amount of which will depend on the time the airplanes are out of service, an aviation lawyer tells LNA.

The lawyer, who is not involved in any litigation from the Lion Air and Ethiopian Airlines MAX 8 crashes, has reviewed scores of Boeing purchase contracts in the ordinary course of his practice. It’s based on terms and conditions under the Service Life clause that he concludes Boeing could face about $1bn in claims for a grounding lasting five months—or until mid-August, as three key US airlines estimate before the MAX returns to service in the US.

The amount climbs the longer the groundings are in place but could be smaller if the global grounding is lifted sooner.

Variables and caveats

There are a lot of variables before arriving at a number.

Some jurisdictions may lift the grounding order sooner than others, reducing the number of months and days compensation may be owed airlines.

Whether the MCAS software is covered by the Service Life clause in the contracts may be an issue.

The lawyer, whose anonymity is required for professional reasons, says the Service Life clause typically covers things like engines, elevators, the fuselage, etc., that Boeing would be obligated to repair without compensation being claims.

Electronics, like MCAS software and the electronic signals it sends, may not fall under the Service Life clause, he said.

Crash liability

Crash liabilities from the two crashes, which occurred outside the US, are subject to international limits under the Warsaw Convention, an aviation-related international agreement dating back decades, and the Montreal Convention.

“Principally Montreal applies,” the attorney says. “If Montreal does not apply, Warsaw applies. They are generally the same except for legal complications. Once the insurance pay out, whatever it is, and I have possibly underestimated, that’s all they can recover from Boeing.”

 These limit the liabilities to about $300m, covered by insurance consortiums. The lawyer estimates about $50m in legal fees. He believes the consortium will turn around and sue Boeing, claiming the MAX was put into service with a safety defect. This is why, among other reasons, Boeing CEO Dennis Muilenburg refused to admit a safety flaw in the MAX when asked at a press conference following the annual shareholders meeting Monday in Chicago.

Admitting a safety flaw would also open the company to “exponential” punitive damages, the aviation lawyer told LNA.

Gearing up for the lawsuits already filed and still to come, along with government civil and criminal investigations, Boeing yesterday name its general counsel to a special position dealing only with the lawsuits and investigations.

Airline compensation

The Service Life clause provides for compensation based on lease rates for the airplanes. Using average rates of $300,000 per month (which may be more or less, depending on a variety of data), times the 376 MAXes currently grounded times an assumed five months (to mid-August), the math comes to $564m.

But there are now scores of MAXes built, with the number growing, that cannot be delivered because of the grounding. The aviation lawyer was not clear how the compensation will be computed for these aircraft, but believes that in the aggregate, the compensation may well already be close to $1bn.

Legal liability fees are on top of this.

You’ll never see a number

An aerospace analyst LNA met with says the public and shareholders will never see what the total liability to Boeing will be.

First, it will take a few years for all the world airlines and Boeing to reach an agreement on compensation, he says.

Second, as LNA has noted several times, compensation doesn’t have to be in cash. It may also be in repricing current orders, steeper discounts on future orders, credits for parts and services and other forms of compensation.

Boeing never revealed the customer compensation for the 2013 three-month grounding of 50 787s.

With MAX compensation likely to come in many forms and spread over several years, the annual amount for a $100bn-plus revenue company won’t be material and wouldn’t have to be revealed under SEC rules, the analyst said.

11 Comments on “Boeing customer compensation for MAX already at $1bn and climbing, estimates aviation lawyer

  1. Isn’t the Warsaw Convention strictly in reference to carriers, not manufacturers. So that although the claims of the relatives etc. of the deceased are limited against Lion and Ethiopian, they are not limited against Boeing.

    • I can only report what the aviation lawyer said.

  2. I’m surprised that $1 billion of compensation wouldn’t be considered “material” by the SEC. I believe the relevant figure would be profitability not sales and a $1 billion hit to the bottom line is certainly material. (I suspect the cost of the 787 grounding was far lower than what this will turn out to be).

    • Do you think they might get creative with accounting and spread the cost over the next 4000 deliveries………

  3. To quote the Montreal Convention document: “2. The carrier shall not be liable for damages arising under paragraph 1 of Article 17 to the extent that they exceed for each passenger 100 000 Special Drawing Rights if the carrier proves that: a) such damage was not due to the negligence or other wrongful act or omission of the carrier or its servants or agents; or b) such damage was solely due to the negligence or other wrongful act or omission of a third party.”

    It seems that the airline is no responsible for the excess damages if it was not negligent (likely the case for these two crashes). So at that point I suspect that the passengers would be able to sue Boeing. Of course I’m not a lawyer …

    • Yes. They will sue Boeing. The US is preferred for ‘disaster’ litigation of all types as the procedures are better known and more important the awards can be huge. With Boeing being a US company and the plane being assembled and mostly made in the US that would be ideal for litigants.

      The Air France AF447 crash , while not involving Boeing, gives an idea of the legal litigation from the passengers against the manufacturer and its suppliers
      “In March, 2010 the first twenty-three wrongful death lawsuits were filed against Airbus, the French manufacturer of the pitot tubes and several U.S. component- part suppliers in the United States District Court for the Southern District of Florida. The component part suppliers included Thales, the French manufacturer of the pitot tubes, as well as U.S.-based component part manufacturers including Intel, G.E., Rockwell, Motorola, Honeywell, du Pont and others.
      This largely covers ‘forum’ issues as the plaintiffs try to file in US courts, not really a problem for the 737 crashes here.

  4. Well, the true impact of this is yet to be assessed. I think the article (and the aviation lawyer) does a good job of totting up the numbers given the known inputs as they are assumed to be today.

    Trouble is that there are lots of other potential inputs to the financial sums. EASA / CAAC might not let it fly ever again. Boeing might get taken to pieces in the claims courts (AFAIK Nader has a good track record of making court cases *painful*).

    There’s been a startling string of revelations in the press over the previous few weeks. Now the WSJ is saying that Boeing’s own test pilots weren’t told of the true extent of MCAS’s interventions. This all adds up to a really stinky picture of how Boeing has allegedly been run.

    This could results in large swathes of Boeing’s senior management being in serious personal legal trouble. This would prevent Boeing from taking seriously pressing commercially strategic decisions (NMA or not? NSA or not? What to do if 777X is a commercial disaster, or not? 787neo or not?).

    Even as things are today Boeing are standing still, whilst Airbus have a clear field in front of them. This is what could cause the really big damage to Boeing, from which they might not recover.

    I think the senior investors in Boeing should think pretty hard about what to do with their company. They really shouldn’t be relying solely on what they’re being told by the company board and management about risks to the company. As an investor with a company coming under such a barrage of poor revelations, it’s always wise to assume that these are true and act in some way (send in an independent expert of one’s own?), even if it’s to simply back up what the management are saying.

  5. Just seen a article in the Seattle time and it reads with my” SHOCK HORROR” Boeing management put a heavy grade wire to a electronic sender switch in the fuel tanks on the Boeing 737 MAX instead of a low current wire even the low current wire shorted out in fuel tank and caused the center fuel tank to explode on TWA 800 according to the accident report by Bill Wiley of the NTSB so every one of the Max’s on the tarmac at Boeing is a explosion awaiting to happen if the max ever return to the sky’s even Warren Buffet has full confidence in the aircraft i bet a beer after he has read the times he will have second thoughts.

    • I assume you’re referring to this article:

      Which does indeed talk about the wiring. Though it’s a bit vague and I didn’t get the point; wire that’s a thicker gauge than necessary for the current being carried doesn’t sound bad, so long as somewhere or other there’s a fuse or mcb to protect the device (a switch in this case?) at the far end.

      Is the point that the current being controlled by the switch much higher than is a good idea to have running through a fuel tank? That is, the wiring gauge is heavier duty because it is in fact carrying a large current? A better design would be to have a high power relay outside the tank switched by a low power signal from inside the tank.

      Presumably this has been carried over from the NG, the design of which originates from before the TWA crash and certainly before the TWA report was finalised. It would be astonishing if an aircraft was being produced today that didn’t incorporate the lessons learnt from that disaster. Can anyone out there confirm or discount that?

      The article also paints a pretty poor picture of how the company viewed ARs.

      It’s also a strong indicator that there’s more to be found from a thorough examination of the entire 737MAX design. Now I’d be horrified if the EASA allowed it to fly with just a software patch.

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