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.
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 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.
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.
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.