Boeing (BA) stock fell 1.2% on Tuesday after a Russian aircraft leasing company filed a lawsuit to cancel orders for the troubled 737 MAX jets. A subsidiary of state-owned Russian conglomerate Rostec, ACS (Avia Capital Services) filed the suit on Monday, according to a Financial Times report. However, the company wants to discuss the matter with Boeing and settle out of court.

Boeing MAX: Customer Sues to Cancel Orders, Stock Fell

Boeing MAX faces first order cancelation

ACS is the first Boeing customer to sue the company due to the 737 MAX grounding. The company wants to cancel its orders. In the lawsuit, ACS blamed Boeing for intentionally hiding information about 737 MAX defects to get the FAA’s approval. The company also accused Boeing of committing fraud and breaching the contract by selling defective MAX planes to its customers.

ACS intends to cancel its order for 35 MAX 8 planes. The company wants nearly $115 million in compensatory damages. According to the Financial Times report, ACS gave Boeing a cash deposit of $35 million to secure the MAX orders. The company wants the deposit back with interest. ACS also wants $75 million in compensation for lost profit.

ACS’s complaint was filed by a Miami-based aviation law firm, Podhurst Orseck, in state court in Illinois. In an interview with the Financial Times, the firm’s lawyer, Steven Marks said, “Boeing had offered compensation but it was inadequate.”

Marks revealed that several other MAX customers are working with the firm to file similar lawsuits. According to the Financial Times, Marks is also representing 30 families of victims from two deadly Boeing MAX accidents.

Rising compensation burden

Boeing’s MAX planes have faced a flying ban globally since mid-March after two fatal accidents in five months. The initial investigation pointed to a software glitch in the aircraft’s safety-control system.

Therefore, air carriers around the world won’t take aircraft deliveries until the safety concerns get cleared. There are nearly 380 MAX planes in service worldwide—72 are owned by three major US airlines. Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL) have 34, 24, and 14 MAX jets, respectively. Together, they have ordered another 408 Boeing MAX aircraft.

Grounding and delays in receiving new Boeing MAX planes are hampering airline companies’ regular business operations. From mid-March until the end of the second quarter, Southwest faced more than 20,000 flight cancelations due to the MAX grounding. American Airlines and United Airlines recorded 7,800 and 3,440 flight cancelations in the second quarter. During the second-quarter results, American Airlines stated that it expects the MAX grounding to have a negative impact on its fiscal 2019 pre-tax income by $400 million.

Therefore, all Boeing 737 MAX owners are demanding compensation from the company for lost revenues and profit due to the MAX grounding. Boeing recorded an after-tax charge of $4.9 billion in the second quarter as an estimated compensation cost for MAX customers. In a report on August 20, Reuters said that the overall MAX crisis compensation costs to air carriers have already crossed $8 billion.

MAX’s return is key to Boeing’s growth

The aircraft’s quick return to service is necessary for Boeing’s long-term growth. Notably, until March, the 737 MAX was Boeing’s fast-selling commercial jet. The aircraft accounted for approximately 70% of the company’s total aircraft deliveries in 2018. Boeing’s 737 MAX generated nearly 30% of the company’s overall operating profit.

However, Boeing’s financials have been impacted due to the grounding. In the second quarter, the company’s overall commercial aircraft shipments fell 54% YoY to 90 units.

Due to lower aircraft deliveries and an after-tax charge of $4.9 billion, Boeing’s second-quarter revenues fell 35% YoY to $15.75 billion. The quarterly revenues were way lower than analysts’ expectations of $18.55 billion. The company reported a quarterly loss for the first time in the last 13 quarters. Boeing recorded a loss of $5.82 per share compared to analysts’ projection of an EPS of $1.87.

Boeing’s troubles could increase if the MAX planes remain grounded. The company’s compensation burden would rise significantly. Boeing might face more lawsuits. Airlines might cancel their orders due to delayed deliveries. They could consider other options to implement their global expansion plans.

The company is trying to fix the issues with its MAX planes. Boeing hopes to submit the final rectification file with the FAA by the end of September. The company expects to get regulatory approval in October. If Boeing gets approval, airlines around the world could resume their Boeing MAX services sometime in the middle of the fourth quarter. The quick return would also help Boeing reinforce safety and service trust among its customers.

Stock performance

Boeing stock has underperformed the broader market and the iShares U.S. Aerospace & Defense ETF (ITA). The stock has gained 10% YTD (year-to-date). The Dow Jones, the NASDAQ, and the S&P 500 indexes have risen 10.5%, 18%, and 14.5%, respectively, YTD. So far, ITA has returned 24.9% this year. ITA invests in manufacturers, assemblers, and distributors of aerospace and defense equipment.

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