One airline has attempted to cancel its order for Boeing's 737 Max 8. Here's why it would be difficult for other airlines to do the same.
- Garuda Indonesia became the first airline to attempt to cancel its order for Boeing's 737 Max 8 aircraft, a decision the airline announced on Friday.
- But other airlines won't necessarily follow Garuda's lead in canceling 737 Max 8 orders, said aviation analysts Henry Harteveldt and George Hamlin.
- The decision to cancel an aircraft order is a difficult one, due to Boeing and Airbus' dominance over the market for large, commercial aircraft, and the series of investments and decisions airlines make when they order an aircraft.
Garuda Indonesia became the first airline to attempt to cancel its order for Boeing's 737 Max 8 aircraft, a decision the airline announced on Friday.Garuda said Indonesian travelers no longer trusted the aircraft after it was involved in two deadly crashes in five months. The first, an October 2018 crash of a Lion Air flight, killed all 189 people on board. The second, an Ethiopian Airlines crash on March 10, killed all 157 people on board.
If 737 Max production stops, "it would take about 0.15% off the level of GDP, or about 0.6%-point off the quarterly annualized growth rate of GDP in the quarter in which production is stopped," the bank said.But other airlines won't necessarily follow Garuda's lead in canceling 737 Max 8 orders. Airlines have not stopped financing 737 Max aircraft that have yet to be delivered, and valuations for the aircraft are the same as before they were grounded in much of the world, according to The Wall Street Journal.
Order revisions are more likely than cancellationsIf airlines do try to change the terms of their orders, they're more likely to reduce their size or renegotiate them, rather than canceling them entirely, the aviation analysts Henry Harteveldt and George Hamlin told Business Insider.
The context of Garuda's decision is important to consider, said Harteveldt, the founder of the travel-research company Atmosphere Research Group. Garuda is the national airline of Indonesia, the site of the October 2018 Lion Air crash, which means "there is a heightened awareness" of the March 10 crash there, Harteveldt said.
And the decision to cancel an aircraft order is a difficult one. Boeing and Airbus dominate the market for large, commercial aircraft, and both have order backlogs, said Hamlin, the president of Hamlin Transportation Consulting."Right now, if you cancel your Max order, what are you going to substitute for? Airbus would love to have more business and to take customers from Boeing, but the A320 family and the 737 line are sold out for years into the future," he said. "You could probably find the occasional airplane, but switching a whole, large fleet order would be quite difficult."
Moving from Boeing to Airbus aircraft could be particularly challenging, since Airbus has less production capacity than Boeing, Harteveldt said.
Canceling an aircraft order is difficult
Beyond capacity constraints, airlines make a series of investments and decisions when they order an aircraft - like training employees, buying the equipment and parts necessary for maintenance, and designing a schedule based around the plane's capabilities - that can be difficult to untangle."As an airline, when you commit to an airplane, it's like getting married in a place where divorce is very difficult," Harteveldt said.
Boeing could end up paying airlines to compensate them for lost revenue opportunities while the 737 Max 8 is grounded, Hamlin said. Norwegian Air has already requested that Boeing do so.Boeing did not immediately respond to Business Insider's request for comment.
The Lion Air and Ethiopian Airlines crashes have put Boeing under intense scrutiny. CNN reported on Thursday that the Department of Justice (DOJ) has subpoenaed Boeing as part of a criminal investigation into the certification and marketing processes for the 737 Max aircraft.The investigation reportedly concerns the process Boeing used to determine its 737 Max aircraft were safe for flight and the data it gave to the Federal Aviation Administration about that process. Investigators have asked for information from Boeing about the company's pilot-training manuals and marketing for the 737 Max aircraft, according to the CNN report.A Boeing representative said the company does not comment on legal matters, and the DOJ and FBI did not respond to Business Insider's requests for comment.
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