Boeing Has a $32 Billion Problem

Alas, poor Boeing (NYSE: BA  ) , I knew it well. Not perfectly... but well enough.

Boeing had a pretty good year in 2011. It won a big military contract, got its 787 and 747-8 civilian airliner programs back on track, and even delivered its first Dreamliner. And yet, I warned Boeing investors of a risk lurking deep within Boeing's balance sheet. A risk that could ground Boeing's stock.

In February 2011, one of Boeing's bigger customers for the Dreamliner program, Air India, accused the plane maker of costing it $1.32 billion in lost revenue by delaying delivery of its planes. Air India didn't come right out and say it wanted compensation for this lost revenue, but it made threats…

…and last week, Air India acted on that threat, demanding that Boeing pony up $1 billion for delayed delivery of its Dreamliners.

The mathematics of failure
How big of a problem is this? It depends on how you look at it. You see, this isn't just an Air India issue. After more than three years of delays, Boeing owes damages to many customers, including struggling, cash-hungry airlines AMR, Delta (NYSE: DAL  ) and United Continental (NYSE: UAL  ) here in the litigation-happy U.S. According to Boeing's order book, the plane maker has firm orders for some 870 Dreamliners. That sounds good, but consider:

(870 planes) / (27 planes owed to AI) x (AI's claimed $1 billion in damages) = $32.2 billion

Granted, this is better than the $59 billion hit I warned about last year. Granted, too, Boeing's ultimate loss could be even smaller. Barclays Capital analyst Joe Campbell, for example, derides AI's demand for $1 billion as "dreamy." (Get it? Dreamliner? Dreamy? This passes for humor on Wall Street.) Campbell thinks a more realistic penalty might be closer to $300 million, which would still work out to:

(870 planes) / (27 planes owed to AI) x (Barclay's estimated $300 million in damages) = $9.6 billion

Foolish final thought
In the very best case, Air India says its contract with Boeing states liquidated damages of $145 million. Assuming that's the ceiling on damages, and is standard in Boeing contracts, Boeing may even get away with paying only $4.7 billion in damages across its 870-plane-long order book. That's a whole heck of a lot better than $32 billion -- but it's still not great news.

It's also a big part of the reason I publicly tagged Boeing as an underperformer earlier this year. I've been right so far. Am I still right? Find out here.

Do you like buying steady-Eddie dividend-payers like Boeing -- but maybe with a bit less litigation risk? Then you'll love the list of 13 high-yielding stocks to buy today we've prepared. Click here and you can download the report for free.

Fool contributor Rich Smith does not own (or short) shares of any company named above. 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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  • Report this Comment On February 13, 2012, at 10:27 PM, MaxFn wrote:

    This math would be true if all deliveries were impacted to the same degree. Boeing's ramp-up and delivery rate actions will not affect any of the later deliveries and to a diminishing extent the early deliveries. Also, economics may drive the airlines to prefer slips in delivery and many airlines may be able to claim a loss. Calculating a loss based on this method would be naïve.

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