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Lion Air and Boeing: a $22 Billion Feud

December 18, 2018 | Expert Insights

The crash of a Boeing Co. plane, that killed 189 people in Indonesia, is spiralling into a $22 billion feud between the aircraft maker and one of Asia’s most influential aviation companies.

In a rare public dispute between the planemaker and one of its biggest customers, the head of PT Lion Mentari Airlines has threatened to cancel an order for billions of dollars’ worth of jets because of what he says is Boeing’s unfair reaction to the crash.

Background

On October 29th, a Boeing 737 Max 8 plane crashed into the Java Sea shortly after departing from Jakarta. The plane was making a one-hour journey to the western city of Pangkal Pinang, Indonesia when it went down. The jet crashed following a request from the pilot for permission to turn back to the airport minutes after taking off from Jakarta. The aircraft was one of Boeing’s most advanced jets. It was just two months old and had clocked just 800 hours of flying time.

According to a preliminary investigation report by the Indonesian National Transportation Committee, a malfunctioning sensor of the Lion Air jetliner wasn’t repaired before the fatal flight that had failed on the plane’s previous trip. The Boeing Co. 737 Max 8’s angle-of-attack sensor, which measures how high or low the plane’s nose was pointed relative to the oncoming air, had malfunctioned minutes before the crash. The sensor erroneously concluded the nose was pointed too high and the aircraft was in danger of losing lift, prompting a stall warning in the cockpit and triggering safety software that attempted to put them into a dive.

Analysis

Lion Air Mentari’s owners one of the world’s largest budget airline is likely to cancel a US$22 billion Boeing jet order out of anger at the manufacturer’s response to not taking accountability for October air disaster.

Rusdi Kirana, the co-founder of Lion Air, Indonesia’s biggest airline, mapped out the seemingly contradictory goals in an interview on Tuesday. The crash that killed all 189 people aboard a Boeing 737 Max won’t derail his ambition to expand the budget carrier to an eventual fleet of 1,000 aircraft, he said. Lion Air may also list its Indonesian unit in 2019, he added.

But it’s not clear if Boeing, the airline’s long-time trade partner, would play a role in that growth given tensions following the crash of a two-month-old aircraft. The budget operator is firming up a formal document to press ahead with cancelling its remaining 737 orders, Kirana said, claiming the US planemaker unfairly implicated Lion Air in the deadly crash.

Still, tripling Lion’s order book might be difficult at a time when Airbus and Boeing narrow-body production is effectively sold out into the early 2020s. And some analysts are sceptical Lion needs all the aircraft it currently has on order amid the brutally competitive southeast Asian travel market. Kirana sounded bullish on Lion’s growth prospects, despite the bruising publicity from the October 29 crash.

It’s almost impossible to cancel firm plane orders without financial penalties. In the interview, Kirana rejected suggestions that his threat to scrap purchases is a ploy to trim an unnecessarily large order book and that Lion Air is struggling to pay for its planes. The airline’s deliveries are fully funded through the end of 2020, he said.

But Kirana may have other options and a big cancellation from a major customer that called into question the reliability of Boeing’s best-selling plane could have repercussions for the manufacturer, even if it managed to squeeze financial penalties from Lion Air.

Assessment

Our assessment is that the clash between Lion Air and Boeing is looking to escalate in the coming months. We understand that this will set an industry precedent for airlines and aircraft manufacturers and the sharing of responsibilities during the crash of any aircraft in the future. We feel that we can except a new Airbus order from Lion Air to replace the cancelled Boeing planes.