Explained: SpiceJet’s agreement with Boeing on compensation for grounding of MAX 737 aircraft

A Boeing 737 MAX aircraft | Representative Image

SpiceJet Limited has announced that it had entered into a settlement with Boeing under which the aeroplane maker agreed to provide “certain accommodations and settle the outstanding claims related to the grounding of MAX 737 aircraft and its return to service.”

“This paves the way for the induction of efficient and younger MAX aircraft into SpiceJet’s fleet and ensures the resumption of new aircraft deliveries from our order of 155 MAX aircraft,” the airline said.

Why did SpiceJet sign an agreement with Boeing for the MAX 737 aircraft?

The Boeing MAX 737 was grounded globally in 2019 following the crash of a Lion Air and then an Ethiopian Airlines MAX aircraft which resulted in the deaths of over 300 passengers and crew members. Indian authorities, like their counterparts globally. grounded the Boeing MAX from flying within the country overflying Indian airspace in April 2019.

Why was the Boeing 737 MAX grounded? 

Investigations into the crash of the Lion Air and Ethiopian Airlines aircraft found that the main reason for the accidents was a design flaw in the aircraft. The latest Boeing 737 model is equipped with a manoeuvring characteristics augmentation system (MCAS), which is responsible for pushing the aircraft’s nose down when it senses a high angle of attack that may lead to an aircraft stalling.

If an aircraft’s nose is too high, the plane loses speed and is likely to enter a stall — a state in which it loses flight and can fall from the sky. The aircraft was designed to prevent such an eventuality, but it did not work in these two fatal crashes.

When was the ban lifted? 

Once the investigation pointed out all the deficiencies, Boeing undertook corrective measures including rectifying the MCAS. It also set up simulators and training centres to train pilots on the MCAS. In November 2020, the US Federal Aviation Administration lifted the restrictions on Boeing 737 MAX, and several other countries including Japan, Europe, the UK, Canada, Brazil, the United Arab Emirates and Australia approved the aircraft’s return to normal service following technical modifications and additional pilot training. From December 2020 onwards, airlines started operating commercial flights using the MAX aircraft.

In India, the Directorate General of Civil Aviation  (DGC)A rescinded its order grounding the Boeing 737-8 and 9 models on August 26, 2021.

Since December 9, 2020, when the MAX was allowed to restart flying worldwide, 34 airlines have been operating 345 such planes. They have attained over 122,000 departures with over 2.88 cumulative hours of flying since then with no untoward incident. American Airlines, Ryanair, flydubai, Air Canada and United Airlines are among the global airlines that have restarted operations with MAX aircraft.

In India, besides SpiceJet, which has 13 MAX aircraft all of which were grounded, the now defunct airline, Jet Airways, too had ordered and had taken delivery of the first of the 150 initial order of the MAX in June 2018. Jet Airways had five MAX planes in its fleet, but they were already grounded as on March 13, 2019, due to non-payment of dues to the lessors.

Why did SpiceJet enter into an agreement with Boeing now?
SpiceJet and Jet Airways were the only two airlines in India which were operating the Boeing 737 MAX 8 when the global ban on the aircraft flying came into effect.

Akasa, the new start-up ultra-low-cost airline launched jointly by billionaire Rakesh Jhunjhunwala and former IndiGo Airlines President Aditya Ghosh ordered 72 Boeing MAX aircraft at the ongoing Dubai Air Show. The order includes the MAX 737-8 and the high capacity 737-8-200 aircraft.

While there is no firm date on when the first of the 72 MAX aircraft will be delivered to Akasa, the airline in a statement said it plans to offer commercial flights starting in the summer of 2022. Globally airlines follow a winter and summer schedule. The winter schedule runs from the last Sunday in October to the last Sunday of March the following year when the summer schedule kicks in.

What does SpiceJet’s settlement with Boeing entail? 

The main aspect of the settlement is Boeing paying compensation to SpiceJet for the losses that it suffered because the MAX aircraft was grounded. Usually such compensation from an aircraft manufacturer consists of two parts -- escalation levels are stopped at the original delivery dates and interest is paid on the pre-delivery payments. Another option is reducing the amount of pre-delivery payments and in certain cases an ad hoc figure per aircraft is decided as compensation which the manufacturer pays the airline.

Escalation is linked to increases in the cost of living index or increases in the retail price index.

Opinions vary on whether the manufacturers pay cash compensation to an airline or adjust what is owed to the airline for the aircraft not being in the air thereby causing financial losses to the carrier.

In the case of Air India, when there was a delay in deliveries of the Boeing 787 Dreamliner aircraft since there were future deliveries, Boeing adjusted the compensation against the delivery prices for these new deliveries.

The delay in compensation being paid by Boeing for its MAX  being grounded became a topic of litigation topic across the world with lawyers suggesting that the aircraft that were grounded would have to be compensated for to the airlines.

How was the settlement decided? 

SpiceJet must have worked out a value in terms of rupees or dollars of what it had lost while the Boeing 737 MAX remained grounded. To arrive at the value of compensation SpiceJet or any airline works out what each day’s grounding of the aircraft cost them. This figure is arrived at by looking at average seat kilometre earning on each route on which the Boeing MAX was intended to be deployed and also taking into account the average passenger load factor on that particular route.

Probably the best way to understand the compensation is to draw an analogy with the Income Tax returns that an individual files every year. Every individual puts down his expenses and seeks deduction. It is for the IT department to accept or reject that claim.

Similarly, SpiceJet would have put a figure on what its daily losses would have been for the time that the MAX was grounded. Acting like the IT department, Boeing would have gone through  SpiceJet’s claim before both sides agreed on what the final amount of compensation was due to SpiceJet.

On November 12 this year, while declaring its Q 2 results for financial year 2022, SpiceJet had said that the Holding Company was in the process of raising claims on the aircraft manufacturer towards cost and losses, which were under discussion.

“Consequently, and without in any manner limiting or prejudicing the legal and the commercial rights of the Holding Company towards its claim in this regard (MAX grounding), certain costs (including, inter alia, aircraft and supplemental lease rentals and certain other identified expenses relating to the Boeing 737 MAX aircraft) aggregating Rs 146.08 crore and Rs 2,89.65 crore for the quarter and half year ended 30 September 2021 (Rs 143.56 crore for quarter ended 30 June 2021, Rs 138.87 crore and Rs 278.91 crore for the quarter and half year, 30 September 2020 respectively, and Rs 560.44 crore for the year ended 31 March 31 2021) were recognised as other income,” SpiceJet had said in its quarterly results.

There would have been negotiations between Boeing and SpiceJet on the figures quoted by the airline before a final figure was arrived at which helped SpiceJet issue its media statement. However, since this is a confidential matter between SpiceJet and Boeing, the real compensation amount is unlikely to be made public.

SpiceJet is yet to be delivered 155 MAX aircraft which it has ordered. Since the delivery of these aircraft will now start, there is also the possibility that the agreement involves reworking the price for these aircraft to adjust for the compensation amount that it is owed by Boeing.