What Cost A Dreamliner Deferred, Airlines Ask

Dreamliner situation, April 10, 2008.
Taken as a group, Asian airlines are the largest customer for Boeing’s new commercial aircraft, the 787 “Dreamliner.” Now, they also stand to bear the brunt of the costs associated with the just announced third delay in the delivery of this fuel-efficient midsized plane.
Together, Asian airline companies account for nearly a third of the Dreamliner’s order book of 892 planes thus far. Two airliners in the Asia/Pacific region–Japan’s All Nippon Airways and Australia’s Qantas Airways –might be particularly affected by the fresh delay Boeing notified its customers about Wednesday, owing to the large numbers of orders they placed with the manufacturer. The popular new jet, capable of reducing fuel costs by 20%, is the most successful launch in Boeing’s history.

All Nippon Airways, which was among the first to endorse the new Dreamliner and placed an order of 50 planes back in April 2004, was to be the first to receive a Dreamliner shipment, this May. Qantas has ordered 65 planes. Both companies will now have to rethink their plans in the near-term absence of the Dreamliner, in an environment of rising fuel prices.

ANA is counting on the Dreamliner to streamline its fleet, replacing older models. An ANA spokesman, Shinichi Shinkawa, told Reuters that it would decide the size of compensation to seek from Boeing once the overall impact from the delay on its business became clear. (See: “All Nippon Airways Finds Boeing’s 787 Delays Anything But Dreamy”) The delivery date for its order is being pushed back to the third quarter of 2009, about 15 months late.

Qantas Airways has plans to use the first 15 aircraft it is buying from Boeing for its budget airline arm, Jetstar, to expand its international operations to Europe and Northeast Asia. Qantas said it is expecting a delay of between 15 and 23 months on its order. (See: “Dreamliner Delay Leads Qantas To Seek Redress”) As a backup, Qantas’s Chief Executive Officer Geoff Dixon said on Thursday it is leasing up to six A330 aircraft for Jetstar and would claim liquidated damages to offset the leasing cost.

Air New Zealand also said on Thursday it will seek compensation from Boeing for the new delay, affecting its order of eight planes.

Airliners in the region’s two fastest-growing markets, China and India, would also see their plans for new routes held back by the delays. China’s four largest airline companies–Air China, China Southern Airlines, China Eastern Airlines and Hainan Airlines–have ordered 48 planes in all. Air India is expecting 27 planes.

High fuel costs notwithstanding, the overall net impact of the delay on airlines’ earnings could end up as positive, by deferring expansion that could lead to excess capacity amid softening global demand for air travel.

“Overall, [there will] not be a major impact. Airlines have been expecting [the delay]. They have made plans for it,” said Tim Bacchus, head of aviation research for Asia at Macquarie Capital Securities. “The potential impact will be largest for airlines using it for growth.”

Airliners in the Asia/Pacific zone may end up reaping windfall compensation benefits at a time when they might otherwise be incurring start-up losses on new international routes, according to the Center of Asia Pacific Aviation. But tight market conditions for wide-body aircraft leasing means carriers will have to cope with cost pressures, particularly those inherent in operating service in the “nascent low-cost long-haul sector,” it added.

Delays in the delivery of new airplanes are nothing new. Not so long ago, Airbus was hit by embarrassing delays in delivering its superjumbo A380 aircraft because of cabin wiring problems. Boeing may be hit with penalties in the region of between $3 billion and $4 billion as a result of the delays.
Shu-Ching Jean Chen, Market Scan