A Look at Boeing's Big Dilemma
One thing is for sure -- any further delays in the delivery schedules of Boeing's (NYS: BA) much-touted Dreamliner aircraft will only prove costlier in the long run. The company's backlog is leading to a range of problems, some of which may be potentially damaging in the long run.
The most recent problem: India's state-owned airline company Air India has sought compensation for an almost three-year delay in delivery of the much-awaited 787 Dreamliners from Boeing.
This seems like a Catch-22 for the beleaguered company. On one hand, giving in to Air India's demands will open up a can of worms. The effects have already begun to show, as America's largest carrier, United Continental Holdings (NYS: UAL) , has also started pushing for compensation along similar lines, with other aggrieved clients waiting to follow suit. On the other hand, a fast-growing emerging market like India is just too risky to ignore in the long run.
Air India had originally asked for $1 billion in compensation from Boeing for the delay, which had reportedly boiled down to the latter agreeing to pay around $500 million. However, the claim has been promptly disputed by the president and CEO of Boeing's commercial aircraft division, Jim Albaugh -- something I'm sure Air India will not appreciate.
Air India itself has faced losses in the recent past. The company has been facing up to $4 billion in debt from the government and owes more than $700 million to oil marketing companies and airports combined. High fuel costs, loss-making routes, high-wage bills, and poor business decisions have negatively affected Air India over the past few years, which also means that any infusion of cash from Boeing will be more than welcome. At the same time, one has to acknowledge that adding more fuel-efficient aircrafts (read: Dreamliner) to its fleet may solve a large part of its problems, too. Given that scenario, Boeing's three-year delay in supply of orders is likely to hit Air India hard.
Consider this: Currently, Boeing has orders for up to 100 aircraft from India, which includes the 27 delayed Dreamliners promised to Air India. Going forward, these orders only look to increase given the rapid growth in air travel in India.
Passenger traffic in India increased to 60 million trips in 2011 from 50 million a year ago, and is further expected to reach the 69 million mark. Add to this the fact that a recent study by Boeing shows that the country will generate demand for 1,320 aircraft worth a staggering $150 billion over the next two decades, and now you know why India should figure high on Boeing's priority list.
The Foolish takeaway
Boeing can compensate Air India, knowing that it might encourage other customers to seek compensation from the company. On the other hand, if Boeing turns a deaf ear to Air India's demands, it runs the risk of ruining good relations with a country with thriving potential demand. Boeing needs to make a careful and informed choice. As for me, I am watching the situation keenly.
What do you think? Post your comments below.
At the time this article was published Navjot Kaur does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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