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Boeing's $32 Billion Problem Gets Bigger

Wham! That sound you just heard was the second shoe dropping, and it landed squarely atop Boeing's (NYSE: BA  ) balance sheet.

Last month, I told you about how major Dreamliner customer Air India had announced plans to sue Boeing for $1 billion in damages over delayed delivery of the 27 Boeing planes it had ordered. I warned you that this problem was only going to get bigger, as airline operators Delta, United Continental (NYSE: UAL  ) , and others, queued up alongside Air India to take potshots of their own at Boeing's bank account.

Now it's happened. United Continental is the first major U.S. airline operator to publicly demand damages from Boeing. The exact amount United is asking for isn't yet known, but considering that it has a 50-plane order in with Boeing -- nearly twice the size of AI's order -- I'd guess that $2 billion is probably in the ballpark. We should be able to firm up that figure soon. Boeing is slated to deliver five Dreamliners to United this year. Once the planes arrive and their delivery date is fixed, the delay clock will stop ticking for these planes -- allowing the size of the damages owed to be determined.

That's important because while United may be the first U.S. customer to sue Boeing over delays, it won't be the last. Delta may be pondering a similar move. I'd also keep an eye open for lawsuits flying in from airplane lessors Air Lease, CIT Leasing, and from AIG (NYSE: AIG  ) subsidiary International Lease Finance -- one of Boeing's biggest 787 customers to date.

What's it mean to you?
Working off Air India's nice, round, $1 billion claim for compensation last month, I suggested that Boeing's delay-of-game fiasco could ultimately wind up costing the company $32 billion in damages. Not everyone agrees. For example, some commentators argue that Boeing will try to limit cash outlays and offer customers "sweetheart deals on new orders and more flexibility in taking future planes" instead.

My response: tomato, to-mah-to. Whether Boeing takes a hit in the form of an immediate charge against earnings, or tries to spread the pain over years, either way profit margins will take a hit. The ultimate cost to Boeing will be the same: $32 billion, potentially. Or eight years' worth of profits, based on what Boeing earned last year. Gone. Poof. Wham.

If you were wondering why I publicly tagged Boeing as an underperformer earlier this year (and why I've been right about that so far), now you know.

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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.

Read/Post Comments (2) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2012, at 11:41 PM, av1234 wrote:

    The 787 backlog of about 870 planes divided by the Air India order for 27 does indeed give about $32B for potential damages. However, Air India is one of the first airlines to order the 787 and its deliveries are probably all going to be about 3 years late. Later airlines won't be taking their planes until much later when the delays will be considerably less than the 3 years, if at all. Also, the airlines stretch their deliveries out over many years as their expansion plans develop and there are openings in the production schedule for Boeing salesmen to offer new airlines earlier positions as an incentive. Those gaps can also be used to compress the existing deliveries to avoid late deliveries. In summary the $32B is probably way too high. Maybe a half or even a third of that and with other give-a-ways or discounts the bottom line to Boeing could be very manageable over the next 10 years.

  • Report this Comment On March 06, 2012, at 1:43 PM, TMFDitty wrote:

    Fair point. To get a good feel for the potential liability, you can check out when orders were first placed here:

    (Hint: Run a user defined report.)


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