When major capital equipment is three years late to anticipated delivery, customers can tend to get extremely annoyed. In the aerospace industry, where operating costs and fuel efficiency are a very big deal, that can often lead to seeking some form of compensation from the manufacturer.
That is the dilemma of Boeing and its 787 Dreamliner program which promises to bring significant operating efficiencies to airline customers. That is, of course, when they actually receive delivery of their shiny new Dreamliners.
The issue came to light last week in a very public way. Air India Ltd. has outstanding orders for 27 Dreamliners and was one of the initial designated airlines scheduled to take delivery in the initial wave of the program. The government of India, which oversees state-owned Air India, publically announced last week that it met with Boeing and agreed to customer payment from Boeing in the amount of $500 million. Actually, the government expected to be compensated in the amount of $840 million and is now asking for even more cash compensation. Air India apparently expected delivery of its initial Dreamliner in February, but issues of fuselage shims and other setbacks have postponed initial delivery until May.
The public dispute caused Boeing to deviate from its previous policy of silence on the issue of customer compensation. In a Bloomberg article reporting on the incident, Jim Albaugh, the chief executive of Boeing’s commercial aircraft business unit is quoted: “I think if we settled for $500 million, somebody would have told me. We don’t comment on deals that we’ve done, but I can tell you that we’re not writing anybody a check for $500 million.” That quote seems emphatic but it also directly counters the impressions of Indian government authorities, a key influential customer.
Both sides have certain stakeholder interests in mind. As the Bloomberg article points out, Air India has recently had to rely on large amounts of government bailout funds because of unprofitable operations. The airline needs to cut costs, and without the 787 in its fleet, any infusion of cash is obviously welcomed.
Boeing has huge financial exposure with the overall 787 program, both with overdue customers as well as major suppliers who have borne additional unplanned program expenses. Publically, the company has always indicated that if would provide delayed customers with different forms of compensation such as discounts on future orders or flexibility in delivery schedules. If the practice of overt cash compensation gathers steam, it could get extremely expensive for Boeing with break-even a very distant milestone. India itself represents a lucrative market segment, with three other airlines besides Air India all competing for a lucrative long-term market. It represents a market segment that any aerospace provider seeks to keep in good standing.
All of these developments continue to place additional pressures on the 787 program supply chain. As the delivery program ramps-up over the coming months and years, there is little tolerance for any more unplanned delays or unforeseen supply disruptions.