Norwegian Scrubs $10.6 Billion Deal in Threat to Boeing Max

(Bloomberg) -- Norwegian Air Shuttle ASA notified Boeing Co. that the carrier is terminating purchases for all 97 of its remaining jets on order, underscoring the financial strains caused by a 15-month grounding of the 737 Max after two fatal accidents.

In more bad news for Boeing's best-selling jet, Singapore-based BOC Aviation Ltd. said in a filing Tuesday it was canceling orders for 30 Max and postponing some deliveries. It's the latest large aircraft lessor to pare orders as Boeing revises its delivery schedule to match much lower-than-anticipated 737 production.

As cash-strapped carriers seek to halt or postpone jetliner deals, the grounded Max makes the U.S. planemaker more vulnerable than Airbus SE to single-aisle cancellations. Buyers often have the right to walk away from deliveries that have been delayed more than a year without risk of penalties. For some 737 customers, that's potential leverage to gain a cash settlement from Boeing rather than discounts on future orders.

Kuwaiti lessor Alafco Aviation Lease and Finance Co. sued Boeing earlier this year, seeking to scrap an order for 40 Max and reclaim the $336 million it said it had paid in advance for the aircraft. Norwegian Air also sued in state court in Chicago Tuesday to have a judge bless its cancellation of the Boeing order.

Others are likely to follow its lead, Douglas Harned, an analyst at Sanford C. Bernstein, said in a Tuesday note to clients.

“While Boeing could pursue a technical legal argument that these are excusable delays, we doubt it would want that debate out in public,” Harned wrote. “But we also do not expect Boeing to roll over and set a precedent that it would return progress payments to any airline that wants them in an environment where no one wants deliveries.”

Boeing dropped 5.8% to $183.30 at the close in New York. Shares of the U.S. planemaker had surged 14% on Monday on the first test flight toward recertification of the Max. The single-aisle workhorse has been grounded since March 2019 following two deadly crashes.

The planemaker and BOC Aviation have been hammering out revised deal terms since last year and the lessor will still retain 57 unfilled Max orders, Boeing said. “In light of the Covid-19 pandemic, we continue to work with our customers to balance supply and demand with market realities, especially in the leasing sector,” Boeing said by email.

Norwegian's decision covers 92 of Boeing's Max narrow-body planes, five of the long-distance 787 Dreamliners and a related maintenance pact, the carrier said in a statement. The airline, which last month reached a rescue deal with its lenders after the Covid-19 pandemic decimated air travel, also threatened to turn to the courts to gain pre-delivery payments for the jets plus compensation tied to the Max's 15-month idling.

The termination roils Boeing's relationship with one of its largest customers in Europe, even if Norwegian's financial troubles had cast doubt on its ability to take all the planes. The airline has converted about $1.5 billion of debt into equity and accessed government loan guarantees to stave off a collapse.

As part of the rescue, Norwegian plans to shrink its fleet from its current 160 aircraft. It's also put a halt to most of its long-haul flights until April 2021. This month, the carrier said it would restart 76 routes in Europe as travel restrictions were eased, allowing it to tap into the usually lucrative summer season when millions of Europeans fly.

Talks with Boeing have “not led to an agreement with a reasonable compensation,” Norwegian said in the statement. The aircraft are worth at least $10.6 billion based on list prices, before customary discounts.

In its Chicago lawsuit, Norwegian Air contends Boeing broke promises to deliver quality aircraft and engaged in “a pattern of intentional misrepresentation and omission, gross negligence and shoddy manufacturing, producing aircraft with substantially impaired value and utility.”

Norwegian Air wants Boeing to take back 737 Max planes that have already been delivered and compensate it for “damage Boeing's conduct has caused Norwegian,” according to the 79-page complaint.

Uncertain Plans

Norwegian is still seeking to work out an agreement with Boeing on compensation, a person familiar with the matter said. The carrier hasn't decided whether to continue using the 18 737 Max aircraft that it already has in its fleet once the plane is re-certified, said the person, who asked not to be named citing confidentiality. Norwegian had earlier planned to use the Max on short-haul as well as trans-Atlantic routes that it no longer plans to pursue, the person said.

“We are not going to comment on commercial discussions with our customers,” Chicago-based Boeing said in a statement. “Norwegian Air Shuttle is a longstanding Boeing customer. As with many operators dealing with a very challenging time, we are working on a path forward.”

Read more: Boeing 737 Max Jet Ends First FAA Test Flight for Comeback Bid

Norwegian is flying only 13 domestic flights operated by eight aircraft. The airline will increase capacity to 20 planes, adding routes to European cities including London, Paris and Barcelona. It's also bringing back about 600 pilots and cabin crew from furlough.

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