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What happens when an airline can't fly its planes

Ethan Wolff-Mann
Senior Writer

More than 350 Boeing 737 Max planes have been grounded, following the tragic Ethiopian Airlines crash that killed 157 passengers and six months after a LionAir Crash that killed 189.

For airlines like Southwest, which has 31 737 Max airplanes, American Airlines that has 24, and Norwegian Air, which has 18, this is more than a major inconvenience — it’s extremely expensive.

It’s a truism in the airline industry that an aircraft should be in the air as much as possible and grounded planes represent money not going to pay for the planes, which cost $120 million a pop.

Analyst Daniel Roeska of Bernstein estimates that it will cost 400,000 Norwegian kroner per day per aircraft, which would come to about $5.9 million per week for 18 planes. In the case of the Rolls Royce Trent 1000 engine issues that plagued some 787 Dreamliners, the fix was an expensive repair and replacement of engine parts that resulted in the British company footing an expensive bill – and a loss of 1.3 billion pounds. But while Norwegian and Rolls Royce came to an agreement over the issue and its fix, it proved costly for everyone, though the details are still under wraps.

So far, Norwegian CEO Bjørn Kos has been the only one to demand compensation for the losses, saying "we will send this bill to those who produce this aircraft."

This seems to be the route that most expect for compensation — from Boeing itself. But sales agreements don’t typically include the loss of FAA airworthiness certificates or a business interruption provision.

In the case of the Icelandic volcano, Eyjafjallajokull, which erupted in 2010, most airlines had to pay for the disruptions themselves because they either did not have business interruption insurance, the standard deductible of 14 days meant no coverage, or the coverage they did have could not deal with something as complex as a volcano.

Boeing has not yet said whether and how it will compensate affected airlines, but the company does have $7 billion in cash on hand, and it may decide to keep these big customers happy given there are many more orders coming.

In a statement to Yahoo Finance, Boeing spokesperson Paul Bergman said it has “paused delivery of 737 MAX airplanes due to the temporary grounding. We continue to build 737 MAX airplanes, while assessing how the situation, including potential capacity constraints, will impact our production system.”

On its website, Boeing calls the 737 Max the fastest-selling plane in its history, racking up almost 4,700 orders from 100 customers. Currently there are 387 of these aircraft around the globe, with 74 of them are registered to U.S. operators.

Much of Boeing’s cash comes from deposits from orders that have been placed, and similarly operating budgets for airlines largely come from tickets sold for flights in the future. While the capacity affected — how many passengers an airline can move — isn’t enormous, it could be enough to make things difficult for smaller airlines like Norwegian that are flying a very thin line.

According to the Scandinavian airline, the grounding is only affecting 1% of capacity. For Southwest, it’s 8% of the available seat miles for the next six months. (Available seat miles is a measure of an airplane's carrying capacity available to generate revenues.) For American Airlines, it’s 2.2%, according to Bernstein’s analysis. (Delta has orders for the 737 Max but doesn’t currently operate this model.)

Besides the expenses of getting replacement planes, other costs loom. In the best-case scenario of software fixes, training and other costs could emerge. And as Bernstein’s David Vernon noted, there could be a risk of passengers avoiding this plane in the future, even after fixes.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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