Boeing Could Have a $16 Billion Problem

When companies have good news to report, they're happy to spam inboxes with press releases galore. But when something goes wrong ... suddenly it seems everyone's playing possum. That's the case with Boeing (NYS: BA) this week.

Last month, I wrote a bit on the subject of Boeing, Air India, and the latter's decision to demand $1 billion in compensation from the former for delayed delivery of a fleet of 787 Dreamliner passenger jets. This month, the BBC reported that India's Civil Aviation Ministry had reached an agreement with Boeing to settle Air India's claim for $500 million.

Boeing immediately denied the report. As commercial airplanes head Jim Albaugh put it, "I can tell you we're not writing anybody a check for $500m ..." But a Fool can wonder: Does this statement mean what it seems to, or is this actually just a nondenial denial, in disguise?

I mean, Albaugh asserts that he's not "writing a check." Well and good. We'll take him at his word. But could it be that Boeing has reached some other understanding with Air India? After all, as I mentioned earlier this month, analysts have already speculated that given its druthers, Boeing would prefer to husband its cash and compensate its injured counterparties with sweetheart deals on new orders and more flexibility in taking future planes. It could well be that Boeing's settlement with Air India -- if there was a settlement -- came in this form, rather than in the form of an actual "check."

I asked Boeing to address this theory a couple of days ago, and have yet to receive any response.

Playing possum
Maybe it's my suspicious nature, but I rather expect I won't be getting a response at all, and the reason is because the theory could be correct. Boeing must compensate its counterparties for the injury it's caused them. (It's kind of set a precedent for this already, you know, seeing as it "reached an agreement" to compensate Spirit AeroSystems last year for disruptions caused on the supply end due to its delays in 787 production.) And given Boeing's reluctance to weaken its balance sheet any further with cash outlays, chances are Boeing really would rather delay the pain, offer discounts on price to its customers, and accept lower profit margins on its planes instead.

Of course, whether Boeing "writes a check" and takes the financial hit immediately, or spreads the pain out over years of selling planes at minimal-to-no profit, it's all the same to investors. Either way, Boeing won't be as profitable an operation as its historical numbers suggest it should be. And as new customers, and suppliers, line up to try and squeeze blood from Boeing's turnip-like cash flow statement, the damage is only going to get worse. Already, United Continental (NYS: UAL) has sued the plane maker over delayed Dreamliners. Air Lease, CIT Leasing, and AIG (NYS: AIG) subsidiary International Lease Finance -- one of Boeing's biggest 787 customers -- might not be far behind.

But Delta (NYS: DAL) probably won't be a problem. Strapped for cash itself, Delta agreed in late 2010 to push back delivery of its 18 Dreamliners all the way to 2020. Presumably, it did this in lieu of seeking damages for Boeing's own delays.

Still, with 852 Dreamliners promised to its non-Delta customers, every one of which is overdue, if we assume that Boeing pays the same amount to each customer per late plane, we get:

(AI's reported $500 million settlement on its planes / 27 planes owed to Air India) x 852 planes = $15.8 billion in total damages owed by Boeing to its customers.

Plus whatever it's going to wind up owing suppliers such as Spirit. Let's not forget that.

What does this mean to you?
In a way, you could argue that this is good news for Boeing. I mean, as recently as last February, we were still talking about the possibility that Boeing's penalty payments could climb into the tens of billions of dollars. Viewed in that context, my new best guess at $15.8 billion in potential penalties removes a lot of risk from an investment in Boeing.

But even so, $15.8 billion is about four years' worth of the profits Boeing earned in 2011. That's a sizable chunk of change (and a big reason why I've placed a negative CAPScall on Boeing stock in CAPS). Even if Boeing succeeds in avoiding the need to write any big "checks" to its customers right away, and even if it spreads out the pain over decades of plane deliveries at cut-rate prices, this portends depressed profit margins as far out as the eye can see.

Caveat investor.

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At the time thisarticle was published Motley Fool newsletter serviceshave recommended buying shares of Spirit AeroSystems Holdings, butFool contributorRich Smithdoes not own (or short) shares of any company named above.The Motley Foolhas adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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