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Airlines Getting Compensation For 787 A380 Delays  
User currently offlineHypersonic From United Kingdom, joined Oct 2005, 149 posts, RR: 0
Posted (5 years 11 months 3 weeks 2 days 6 hours ago) and read 3936 times:

Hi,
This is a post equally in defence of both Boeing & Airbus..

I basically want to get clarification of WHY airlines can demand, expect, & do receive compensation for the lateness in the delivery of a NEW aircraft type like the A380 or 787.

Perhaps some light can be shed on this.... in placing an order for X airplanes, does Y airline stump up millions of $ in deposits for that aircraft, thus Boeing & or Airbus are sitting on the airlines money, while the Airline is out of pocket & not earning interest on their cash, but waiting for their shiney new plane type to be delivered?

OR is this some disgusting compensation culture where despite the Manufacturer politely saying to the airline,... 'You'll damn well get it when it is bloody well SAFE & Ready to be delivered & not a day before,! so show some patience" Doesn't mean Sh*t?

Even putting any deposit aside for the moment... It's not as if said Airline is ceasing to function simply because a new plane type isn't in their hands yet..

So if the compansation comes down to the Airline 'sulking' - " True we have our current fleet serving us just nicely right now,..... But we made plans to introduce 'new' plane by X date, & now we can't... Boo Hoo.... Out fly the toys from pram"
If it's really down to the deposit... Then Airbus & Boeing should simply hand the money back (Thus removing the airlines ammunition for an excuse for compensation), I'm sure they survive (A & B) on cash flow from 'sold' planes that are built & delivered, not solely from cash handouts of future planes yet to be delivered.

In any case, this whole compensation thing from airlines seems to be a bit of a p*ss take. - I would expect Airlines - especially when a radically NEW plane type is involved, to be a little more patient & understanding.

In most other businesses, if a customer demanded compensation for a delay on something that they weren't relying on in the first place, especically if they hadn't layed down any cash up front... they'ed be told to FO! ?

Look forward to some lively debate  Smile
Cheers
Hyper.

10 replies: All unread, jump to last
 
User currently offlineMoo From Falkland Islands, joined May 2007, 3829 posts, RR: 5
Reply 1, posted (5 years 11 months 3 weeks 2 days 4 hours ago) and read 3859 times:



Quoting Hypersonic (Thread starter):
OR is this some disgusting compensation culture where despite the Manufacturer politely saying to the airline,... 'You'll damn well get it when it is bloody well SAFE & Ready to be delivered & not a day before,! so show some patience" Doesn't mean Sh*t?



Quoting Hypersonic (Thread starter):

Even putting any deposit aside for the moment... It's not as if said Airline is ceasing to function simply because a new plane type isn't in their hands yet..



Quoting Hypersonic (Thread starter):
So if the compansation comes down to the Airline 'sulking' -



Quoting Hypersonic (Thread starter):
In any case, this whole compensation thing from airlines seems to be a bit of a p*ss take. - I would expect Airlines - especially when a radically NEW plane type is involved, to be a little more patient & understanding.

In most other businesses, if a customer demanded compensation for a delay on something that they weren't relying on in the first place, especically if they hadn't layed down any cash up front... they'ed be told to FO! ?

Thats the problem, they *are* relying on the aircraft - right from the moment they place the order.

Aircraft are multi million dollar investments, you can't simply order a dozen and wait until they actually arrive before you start planning your longterm strategy around them, that planning starts from the moment you decide you need to expand.

Airlines have sunk significant costs into increasing workforce capability, capacity at airports, maintenance agreements, supply chains and everything else that they need to operate a type - an aircraft purchase is not done in isolation, its done as part of an entire chain of support additionals that are needed.

So no, its not about the deposit, its about the millions of dollars of incidental costs that the airline has incurred in preparing for the type, and also the millions of dollars of extra additional costs they will incur from having to extend leases, maintenance periods, extra fuel usage, lack of ability to expand etc etc.

There are real costs involved here, it doesn't just start with the delivery of the aircraft, airlines will have been spending out from the moment they signed the purchase contract, and the delays will be costing them money - money that would have been going toward repaying the sunk costs involved in preparing for that types delivery.


User currently offlineBill142 From Australia, joined Aug 2004, 8434 posts, RR: 9
Reply 2, posted (5 years 11 months 3 weeks 2 days 4 hours ago) and read 3846 times:

It's called a contract. One side promises to provide a product or service within a specified time, the other promises to pay. If one side breaks the contract, the the other is entitled to seek some kind of penalty.

User currently offlineBreiz From France, joined Mar 2005, 1892 posts, RR: 2
Reply 3, posted (5 years 11 months 3 weeks 2 days 3 hours ago) and read 3784 times:



Quoting Hypersonic (Thread starter):
I basically want to get clarification of WHY airlines can demand, expect, & do receive compensation for the lateness in the delivery of a NEW aircraft type like the A380 or 787.

Without insight to the contracts, it is difficult to be sure about the conditions.
However, it is common practice in any kind of industry, that a penalty clause is agreed upon in case of late delivery of the goods ordered. The purchase of a flat or a house comes to mind.
So, it is not a question of "disgusting compensation culture".
As indicated by Moo, airlines invest a lot in activities around a new aircraft, and the are expecting to have a return on investment according to their plan. You screw their plan, you have to pay a penalty, or compensation as it is named.
Remember that buying an aircraft is not just like buying a car.
Or if we take this parallel, it's like when you order the car, you have before getting it to get trained to drive it, to maintain it, to build a garage for it, to agree with the local gas station to refuel, to get a deal with Mac for food, ....


User currently offlineDavescj From United States of America, joined Jun 2007, 2292 posts, RR: 0
Reply 4, posted (5 years 11 months 3 weeks 2 days 3 hours ago) and read 3767 times:



Quoting Hypersonic (Thread starter):
In most other businesses, if a customer demanded compensation for a delay on something that they weren't relying on in the first place, especically if they hadn't layed down any cash up front... they'ed be told to FO! ?

As pointed out, airlines are depending on the 787/380. Remember, it is not only capacity, but retirement of older planes. If I plan to stop leasing X plane on Y date, the owner of that plane may have found a new lessee for it. If my new plane doesn't come it, I'm injured by that lack.

If you tell a customer to FO, you'd lose LOTS of customers. Further, you'd have pissed a customer off enough not only to take you to court, but get a couple of pissed off customers together, and you have class action and massive legal bills to contend with not to mention bad press.

Ultimately, it is a contract issue. You promised X product on Y date. Your failure to deliver is quite simply, NOT MY PROBLEM. I don't care why it isn't done. I expect you (producer) to have the product. Simple.

Sides, by not making a fuss, B and A keep themselves as companies easy to work with.

Dave



Can I have a mojito on this flight?
User currently offlineCloudyapple From Hong Kong, joined Jul 2005, 2453 posts, RR: 9
Reply 5, posted (5 years 11 months 3 weeks 2 days 2 hours ago) and read 3672 times:



Quoting Hypersonic (Thread starter):
I basically want to get clarification of WHY airlines can demand, expect, & do receive compensation for the lateness in the delivery of a NEW aircraft type like the A380 or 787.

You complain and expect compensation if your 18:45 Waterloo to Southampton SWTrain was 3 hours late. And if you needed a fridge and bought one at your local Comet, expecting it to be delivered next Tuesday but it didnt turn up that evening, what do you think you'd do?



A310/A319/20/21/A332/3/A343/6/A388/B732/5/7/8/B742/S/4/B752/B763/B772/3/W/E145/J41/MD11/83/90
User currently offlineStitch From United States of America, joined Jul 2005, 29690 posts, RR: 84
Reply 6, posted (5 years 11 months 3 weeks 2 days 1 hour ago) and read 3627 times:
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Quoting Hypersonic (Thread starter):
I basically want to get clarification of WHY airlines can demand, expect, & do receive compensation for the lateness in the delivery of a NEW aircraft type like the A380 or 787.

It's called "Contract Law". When the manufacturers and the airlines write the sales agreement, they write into that contract things like compensation for delayed deliveries.



Quoting Hypersonic (Thread starter):
Perhaps some light can be shed on this.... in placing an order for X airplanes, does Y airline stump up millions of $ in deposits for that aircraft, thus Boeing & or Airbus are sitting on the airlines money, while the Airline is out of pocket & not earning interest on their cash, but waiting for their shiny new plane type to be delivered?

More or less. Both manufacturers require a deposit, which can range anywhere from 1% (IT's order with Airbus) to upwards of 33% (the Boeing tour), when the contract is signed.



Quoting Hypersonic (Thread starter):
In most other businesses, if a customer demanded compensation for a delay on something that they weren't relying on in the first place, especially if they hadn't laid down any cash up front... they'd be told to FO!

It depends on the contract. If I contract to have a TV delivered and installed and they don't show up until the next day because the truck breaks down, if my delivery agreement says I am not entitled to any compensation, then I am at the mercy of what the vendor wishes to provide because the margins on the product are so low that the vendor likely can't offer me more then maybe a set of cables and it's not like not having a (new) TV for 24 hours is any great hardship.

If I have a contract to install a new System/390 mainframe and data storage subsystem to run my business and they don't show up for a week because an earthquake takes out a HDD production factory and they need extra time to source the drives, my contract might very well have financial penalties written in because I have spent a great deal of time and money preparing for the new installation and in fact might be losing money using the older system so every day that I have to wait for the system to be installed costs me money.


User currently offlineBreiz From France, joined Mar 2005, 1892 posts, RR: 2
Reply 7, posted (5 years 11 months 3 weeks 2 days 1 hour ago) and read 3607 times:



Quoting Stitch (Reply 6):
because an earthquake takes out a HDD production factory

In that case, the "Force Majeure" clause will prevail and you won't be entitled to any compensation for delay Smile


User currently offlineSebring From Canada, joined Jul 2004, 1663 posts, RR: 14
Reply 8, posted (5 years 11 months 3 weeks 2 days 1 hour ago) and read 3607 times:



Quoting Stitch (Reply 6):

If I have a contract to install a new System/390 mainframe and data storage subsystem to run my business and they don't show up for a week because an earthquake takes out a HDD production factory and they need extra time to source the drives, my contract might very well have financial penalties written in because I have spent a great deal of time and money preparing for the new installation and in fact might be losing money using the older system so every day that I have to wait for the system to be installed costs me money.

And yet in the case of an earthquake, force majeure might apply.

But Boeing is not in a force majeure situation.

In essence, Boeing is on the hook for compensation if a compensation clause was negotiated with any or all of the 787 buyers. The compensation should be spelled out by the contract, and might vary by customer, depending on whether the customer negotiated well, placed a large order, cared more about unit price than compensation, etc. Right now, the airlines have to think of extending leases on older aircraft to make up for the delays, and they have in many cases contracted with sub contractors to supply things like seats, entertainment systems, cockpit avionics, etc. So the airline may have made capital outlays in addition to the deposits paid to hold delivery slots.


User currently offlineStitch From United States of America, joined Jul 2005, 29690 posts, RR: 84
Reply 9, posted (5 years 11 months 3 weeks 2 days 1 hour ago) and read 3593 times:
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Quoting Breiz (Reply 7):
In that case, the "Force Majeure" clause will prevail and you won't be entitled to any compensation for delay.  Smile



Quoting Sebring (Reply 8):
And yet in the case of an earthquake, force majeure might apply.

Okay. So all the new HDDs in the world are on a ship and the Captain gets drunk and runs it aground and it takes a week to dry them all off and install them...  Smile

The point was that the more expensive and critical the product, and the more money/profit involved, the more likely the contract will have compensation claims written into it.

Speaking of "Force Majeure", I wonder how hard-ball Boeing is going to play with their Engineering and Machinist unions this year. Boeing might very well welcome a strike of their engineering union, at least, since they could then invoke "Force Majeure" on the 747-8 and 787 programs and buy some time with the airlines. With only 1000 or so machinists on the 787 program, and the need to keep the other programs running, I expect Boeing will "play ball" with the Machinists.


User currently offlineBreiz From France, joined Mar 2005, 1892 posts, RR: 2
Reply 10, posted (5 years 11 months 3 weeks 2 days ago) and read 3529 times:



Quoting Stitch (Reply 9):
Okay. So all the new HDDs in the world are on a ship and the Captain gets drunk and runs it aground and it takes a week to dry them all off and install them...

Although if your HDDs are delivered ex-works and the shipping company is a third party and the ship has a flag of convenience while the Captain was just hired for the job and it can be proven that the marine chart was not updated....the lawyers will enjoy themselves  crazy 

Quoting Stitch (Reply 9):
The point was that the more expensive and critical the product, and the more money/profit involved, the more likely the contract will have compensation claims written into it.

100% agreed. The clause for penalty on delay is asked for by the buyer, precisely in light of its own risk if the goods are not delivered on time.


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