Monday, June 29, 2009

Boeing Feels New Pressure to Placate Its 787 Buyers

By PETER SANDERS and DANIEL MICHAELS The latest delay to hit Boeing Co.'s 787 Dreamliner has complicated an intricate set of negotiations, giving airlines a chance to wrangle concessions from the plane maker on delivery dates, installment payments and even the final purchase price. Already nearly two years behind schedule, the Dreamliner was the fastest selling commercial airplane in Boeing history -- at one point over 900 orders were on the books. After a spate of cancellations that number is now closer to 850. Last Tuesday, Chicago-based Boeing said a structural flaw detected during ground tests required additional reinforcement on the Dreamliner, a problem that will delay the plane's first test flight, possibly for months. Delivery delays can wreak havoc on an airline's ability to plan its routes and schedules. But they also can provide an opening to renegotiate complicated contracts that govern airplane purchases. Boeing is coming under pressure from its customers to offer fresh concessions. Industry officials say that Boeing has recently stopped discussing compensation terms for delays to the 787 and they speculate the company is waiting until its actual delivery schedule is clear. "We want to discuss compensation, but Boeing hasn't opened the books," said an official at one Dreamliner customer. Already, the delays have cost Boeing millions of dollars in penalties and concessions to customers. "Our focus is always on our customers and as we've done throughout the development program, we will work closely with them regarding the program and the impact of this issue," says a Boeing spokesman. Even before the recent delays, some airlines were getting frustrated with Boeing's frequent schedule changes. Akbar Al Baker, chief executive of Qatar Airways, threatened to cancel orders for both 787s and larger 777s, which are now in production, because of disruption caused by problems at Boeing. "Boeing doesn't realize how much they're hurting their customers' plans," Mr. Al Baker said at the recent Paris Air Show. Qatar Airways has firm orders for 30 787s and options for 30 more. The first were due for delivery in 2011 but that arrival date is now uncertain. Boeing says its delivery timetable for the aircraft hasn't been updated. A Boeing spokesman said the company was trying to work with Qatar Airways to resolve problems. Airlines world-wide are struggling with rising oil prices and falling passenger revenue. Fitch Ratings recently downgraded the corporate ratings of UAL Corp. and Delta Air Lines Inc. Actual cancellations are rare, but last week Australia's Qantas Airways Ltd. said it scratched orders for 15 787s and delayed deliveries on 15 others slated to arrive in 2014-15. Qantas -- which remains the largest Dreamliner airline customer with 50 planes still on the books -- had some leverage to cancel because of its large number of orders, industry observers say. Qantas also retained options to buy dozens more of the planes. Qantas executives cited a global economy that is far different today than it was when it placed the order in 2005. It said it had been in discussions with Boeing for months. For Boeing, the cancellations have a silver lining. The jet maker now has a little more breathing room it can use to fill remaining orders more quickly, thereby avoiding some penalties. "From Boeing's perspective, that's not necessarily bad news when you have a rollout going this poorly," says Peter Barlow, an aviation attorney with Smith, Gambrell & Russell LLP. "The way purchase agreements are drafted, a savvy purchaser will obtain daily damages, and if a plane isn't delivered on time, the customer receives a daily penalty [from the manufacturer] that can be a very big number." Though the 787's list price is roughly $178 million, customers typically receive discounts. The price negotiated at the time of the order is rarely the price paid when the plane is delivered years later. Typically, customers make "pre-delivery payments" every six months, beginning about 18 months prior to delivery, that amount to around 30% of the total purchase price. Payments often escalate as the delivery date approaches, says Mr. Barlow. Everything in that process is negotiable, Mr. Barlow says. Several carriers, including Air New Zealand Ltd., British Airways PLC and Virgin Atlantic Airways Ltd., are coping with 787 delays by ordering current-model planes from either Boeing or Airbus, a unit of European Aeronautic Defence & Space Co. Virgin, for example, last Monday announced an order for 10 Airbus A330s, which are slightly larger than Dreamliners and not as cutting-edge, but are available next year and in 2011. "We weren't prepared to have six years of no new aircraft being delivered," said Virgin spokesman Paul Charles. He said Virgin is still talking to Boeing about compensation. "We would like to see the compensation reflect the ongoing delays," Mr. Charles said. Ethiopian Airlines, one of the first airlines to order 787s, has kept its order even after bank-financing that it had arranged fell apart, according to a banker familiar with the situation. The airline will instead initially finance its purchase with its own cash, this person said. Officials at Ethiopian Airlines didn't respond to requests for comment. —Susan Carey and Stefania Bianchi contributed to this article Write to Peter Sanders at and Daniel Michaels at

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