New York Times (June 1, 2012)
Air India’s Boeing Showdown Could Be a Mistake
By HEATHER TIMMONS and MALAVIKA VYAWAHARE
Paul J. Richards/Agence France-Presse — Getty Images
A new Boeing 787 Dreamliner built for Air India is rolled off the
production line at Boeing’s new production facility in North
Charleston, South Carolina, in this April 27, 2012 file photo.
The Indian government’s latest showdown with a foreign corporation pits
the country’s money-losing state airline against delay-plagued plane
manufacturer Boeing.
Officials from Air India, which ordered 27 Dreamliner planes said this
week they refuse to take delivery of a completed aircraft until Boeing
pays compensation for delays in delivering the aircraft. Indian
officials have floated an amount in the media that many industry
experts say is exceptionally high – as much as $1 billion, or $37
million per plane, which could be half their purchase price.
The first Dreamliner plane made for Air India has been examined by Air
India’s engineers, cleared all regulatory hurdles, and is waiting
resolution of the compensation issue before it can be brought to India.
The planes are expected to save airlines on fuel costs because of their
lighter weight.
Boeing executives say they hope the issue will be resolved shortly.
“The airplane is ready for delivery, and has all regulatory approvals,”
said Dinesh Keskar, vice president of Boeing International, in a
telephone interview Thursday. “We are looking forward to delivering
this plane to Air India soon, which will be a key part of the company’s
turnaround plan,” he said.
The public spat is the latest pitting the Indian government against a
foreign company doing or hoping to do business in India. Vodafone
Group, the telecommunications operator, is seeking international
arbitration over retroactive tax legislation that could cost it
billions of dollars; international retail companies hoping to expand
here have been stymied by a reversal in government policy and mining
and steel companies have been thwarted in their Indian expansion plans
by red tape and delays.
Air India officials have said publicly they are seeking anywhere from
$710 million to $1 billion in compensation for the Dreamliner’s delays.
What they settle for may be much less than that. The Dreamliner planes
cost between $65 million and $85 million each, analysts say, adding
that compensation for delays is generally in the range of 5 percent to
10 percent of an airplane’s cost.
“The $710 million figure sought by Air India will never be paid,”
predicted Saj Ahmad, chief analyst at StrategicAero Research in London.
“Air India has pussyfooted around the whole 787 saga with disgrace —
they are threatening to delay deliveries, when it is this fuel-saving
airplane that can drive down their operating costs,” he said.
Compensation between airlines and plane makers for manufacturing delays
is usually quietly negotiated on a case-by-case basis, much like the
cost of the planes themselves. The Dreamliner, which was originally
scheduled for delivery worldwide in 2008, has hit a number of delays
related to faulty parts and labor strikes.
Boeing is in negotiations with a number of airlines about compensation
for these delays, but the Air India negotiations stand out because of
their public nature and the large dollar figure put forward in Indian
media.
Mr. Keskar would not discuss any details of negotiations. K.
Swaminathan, Air India spokesman, also said he could not comment.
“Whatever the board has decided has been forwarded to the government,”
he said, adding that confidentiality clauses prevent him from saying
more.
Boeing has three of the 27 Dreamliner planes that Air India ordered
ready for delivery in coming weeks. Air India engineers and pilots have
already examined one plane and it is ready to fly to India. To date,
Boeing has not paid Air India any compensation for the delays
In March, an Indian civil aviation official told reporters at an air
show that Boeing had agreed to pay $500 million in compensation, but
that the government was seeking more. “We’re not writing anyone a check
for $500 million,” a Boeing official shot back during an investors
conference in New York.
On Tuesday, India’s civil aviation minister Ajit Singh told reporters
that Air India would seek arbitration if Boeing did not comply with its
demands. Air India’s management has written a letter to Boeing, asking
to be compensated on an aircraft to aircraft basis, rather than a lump
sum, the Financial Chronicle reported.
The $710 million figure, first floated by former Air India Arvind Yadav
in India’s Parliament in 2008, was derived at by the company by
calculating the amount of money it felt Air India had lost by not
receiving the planes on time.
Airline experts say that Air India’s calculation is unusual. “It is
usually a precise mathematical formula which determines,” compensation
said Amber Dubey, director, aerospace, for global consultancy firm
KPMG. “The issue could be that it has not been very clearly spelled out
in the contract between Boeing and Air India which could be why there
is even scope for such negotiations,” he said.
If, in fact, Boeing were to pay the sort of compensation Air India is
asking for all the Dreamliner planes that are delayed worldwide, it
would pay out some $32 billion, Motley Fool calculated.
Ajit Solanki/Associated Press
A passenger makes an enquiry at an Air India counter at the airport in
Ahmedabad, Gujarat in this May 11, 2012, file photo. Air India
cancelled at least 20 international flights due to a strike by pilots.
Air India has been crippled by a pilots strike in recent weeks, which
forced the company to drop some international destinations on Friday.
The strike may be a disadvantage as the company negotiates with Boeing,
because the company desperately needs to increase flights and profits
after dozens of cancellations. “Unfortunately, Air India is in a weak
position given the pilot strike,” said Charles Dhanaraj, associate
professor of management at Kelley School of Business, Indiana
University. “In some way this delay in taking delivery is going to work
against them,” he said.
“At the end of the day, those Air India jets could conceivably end up
in another operators hands – ownership of those airplanes already built
are not Air India’s until they pay off the majority of the outstanding
balance, usually done on delivery,” said Mr. Ahmad.
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