Boeing (BA) has agreed to compensate Turkish Airlines for the losses caused by grounded and undelivered 737 MAX jets. Turkish Airlines revealed the deal in a statement released on Tuesday.
The airline didn’t specify the actual compensation amount it would receive from Boeing. However, the company said that the deal would only cover part of the loss. Turkish Airlines said that the two companies “came to an agreement concerning compensation for certain losses” related to MAX aircraft.
Citing reports from Turkey’s local newspaper, Hürriyet, Reuters revealed that the deal amount could be worth $225 million. The report stated that Boeing would pay $150 million in cash and cover future training expenses and repair parts worth $75 million.
Boeing avoids court case
Boeing’s latest compensation deal helped prevent a court case with Turkish Airlines. In mid-December, media reports said that Turkish Airlines was prepared to sue Boeing for the losses caused by the MAX crisis.
Notably, Turkish Airlines has been one of the hardest-hit airlines due to the MAX grounding. Before the worldwide grounding in mid-March, Turkish Airlines had 12 Boeing 737 MAX aircraft. The airline was supposed to receive another 12 MAX planes this year. In total, Turkish Airlines ordered 75 MAX airplanes between 2013 and 2015.
Due to the grounding and undelivered new MAX planes, Turkish Airlines is losing seating capacity in the domestic market. From January to November, the carrier’s seating capacity fell 6.7% YoY (year-over-year) in the domestic market. As a result, the airline carried 1.2% fewer passengers in the first 11 months of 2019 compared to the same period in 2018. The passenger load factor also contracted by 40 basis points YoY to 81.7%.
Other airlines seek compensation too
Turkish Airlines is the second carrier that Boeing agreed to compensate for the losses caused by the MAX grounding. Earlier in December, Boeing reached a confidential agreement with Southwest Airlines (LUV) to cover a portion of the damages. To learn more, read Southwest Strikes Deal with Boeing for MAX Compensation.
During the third-quarter results, Southwest Airlines estimated that the MAX grounding would hurt its fiscal 2019 operating income by $435 million. American Airlines (AAL) is also negotiating with Boeing for compensation. The airline has 24 Boeing MAX planes. American Airlines expects to lose $540 million in revenues in 2019.
United Airlines (UAL), which has 14 MAX aircraft, hasn’t disclosed the financial impact of the MAX grounding. The company has partially filled the vacant MAX fleets with its larger and older planes. However, using jumbo and less fuel-efficient jets makes the operating expenses rise.
Boeing’s growth prospects depend on the timing of the 737 MAX’s returns to service. However, some recent developments have squashed the hopes of an early return. Industry experts don’t think that Boeing will receive regulatory approval to fly MAX aircraft before late February or early March.
The three major US carriers don’t expect MAX aircraft to return to skies before the second quarter of 2020. Recently, United Airlines extended the grounding of its MAX planes until June 4 from March 4. Southwest Airlines and American Airlines have removed MAX fleets from their flying schedules through April 13 and April 6, respectively.
MAX grounding to hurt Boeing’s financials
The prolonged MAX grounding is impacting Boeing’s financials severely. Costs associated with the MAX crisis reached $9.2 billion at the end of the third quarter. Among the total, the company has kept aside $5.6 billion to compensate MAX customers for their losses.
We think that Boeing’s compensation provisions will rise significantly due to the longer grounding period. The company made the compensation provisions under the assumption that MAX aircraft returned to skies in December 2019.
The remaining $3.6 billion is related to higher production costs due to reduced output. In April, the company lowered the MAX monthly output by 19% to 42 units from 52 units. To save on the production costs, the company halted the MAX output from January 1. Analysts don’t think that the production halt will help much. As a result, the company will still burn cash.
JPMorgan Chase analyst Seth Seifman thinks that Boeing will continue to burn $1 billion in cash every month despite the production suspension. His estimates show that the company was draining approximately $2 billion of cash every month until December.
To learn more, read Boeing Halts MAX Production, Analysts Cut Target Price.