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.
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