India and Boeing spar over delay compensation

A 787 Dreamliner passenger jet is tested above the Boeing factory at Paine Field in Everett, Washington state on March 20, 2011.

Story highlights

  • India's Ministry of Civil Aviation says Boeing agreed to pay a little over $500m for compensation
  • Boeing challenges that claim but left open the possibility that Boeing might have offered Air India indirect compensation
  • The first 787 Dreamliner was delivered to All Nippon Airways in September 2011, more than three years behind schedule

Officials from the Indian government and Boeing, the US aircraft manufacturer, have sparred over compensation for the late delivery of the company's 787 Dreamliner aircraft to Air India.

"Two weeks back they [Boeing] agreed to pay a little over $500m," Prashant Sukul, joint secretary at India's Ministry of Civil Aviation, told reporters, adding that Air India had pushed for even greater sums.

But speaking at a conference in New York on Wednesday, Jim Albaugh, chief executive of Boeing Commercial Airplanes, appeared to directly challenge that claim.

"I think if we settle for $500m somebody would have told me. We don't comment on deals that we have done, but I can tell you that we are not writing anybody a cheque for $500m," he said,

Mr Albaugh's comments left open the possibility that Boeing might have offered Air India indirect compensation, such as discounts on the price of future aircraft purchases.

Doug Harned, with Bernstein Research, noted earlier in the year that compensation would most likely be provided to customers as price reductions on 737 or 777 aircraft, which would protect the profitability of the programme but not of Boeing's overall business.

"If deliveries slip, compensation to customers should rise," he wrote.

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Since 2004 Boeing has received 873 orders for 787s from about 60 customers, making it the company's fastest-selling wide body jet, but the programme has been plagued by delays.

The first aircraft was finally delivered to All Nippon Airways, the launch customer, in September 2011, more than three years behind schedule. Boeing is ramping up production and plans to build five a month later this year and 10 a month by 2013.

The spat underscores the high stakes involved for all parties. Airlines have had to postpone adding certain potentially profitable routes, leading to demands for compensation, while Boeing has been struggling to get finished aircraft out of its hangars on time and on budget.

For its part, Air India had been seeking at least $1bn compensation after placing an order for 27 of the 787 aircraft in 2005, worth $5.2bn at list prices.

The delays to the twin-aisle 787 stem from the complexity of its supply chain and from challenges associated with its innovative use of carbon composites in the fuselage and wings, which make the jet lighter.

Demand for the aircraft has been strong because the combination of composites and new, efficient engines mean the 787 is supposed to burn 20 per cent less fuel compared with the Boeing 767, which the new aircraft in effect replaces.

Nick Cunningham, with Agency Partners, said several of Boeing's initial customers for the 787 were likely to receive compensation for late delivery of the aircraft. "Early customers will be getting compensation for very substantial delays," he said.

ANA said last year that it had already received some compensation, although it declined to provide details.

Mr Cunningham estimated the development cost of the 787 to be much higher than Boeing's original $12bn budget, adding that achieving profitability on the programme would hinge partly on the company's ambitious plan to increase production of the aircraft.

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