How much compensation should an airline get for delayed aircraft deliveries? By Daniel James, Senior Associate, Stevens & Bolton LLP

Given the increasing scale and complexity of commercial aircraft design, manufacture and certification it is perhaps inevitable that rarely, if ever, do new aircraft types get delivered in time to the airlines that have been waiting in line for their shiny new combination of advanced composites and electrical wizardry. I know how impatient I can become when awaiting a new gadget or gizmo to arrive, so can only imagine the frustration of waiting for the delivery of, not only an aircraft, but a critical business asset!

With the Boeing 787 and Bombardier CSeries making recent headlines for entry into service delays, and with the 787’s eventual deliveries further blighted by apparent Li-ion battery failures, reports have suggested that compensation to airlines will run into tens of billions of dollars for the 787 alone. 

So where does this leave the airframer-airline relationship?

Much of course will depend on the relevant bargaining position of the parties. An airline spending billions of dollars on new kit might expect to receive greater concessions from a supplier than a party purchasing one solitary aircraft. On the flipside, the potential losses that would be incurred by the larger, big spending, airline as a result of late delivery would likely dwarf that of the smaller operator, and the manufacturer will of course be alive to such issues.

And what about the airline ordering Airbus A380 aircraft? It doesn’t really have the option to cancel the order and look for an equivalent aircraft given the A380’s unique nature, whereas an airline ordering aircraft in the crowded 100-120 seat arena may have more leverage over the manufacturer.  Even then however, cancellation of orders may still cause significant issues for the airline in circumstances where it has most likely announced its new aircraft to the world with much fanfare and marketing expenditure, not to mention research and evaluation expenditure on the type.

For the most part the actual details of compensatory settlements with the carriers are kept under wraps (perhaps more for the manufacturer’s benefit than anyone else’s) and Boeing was quick to deny last year that it was writing a cheque for $500m to Air India in respect of 787 delays when the carrier announced settlement of its rumoured $1bn claim against the airframer.  

Clearly preferring not to make sizeable cash payments in compensation to airlines, it is speculated that the airframers will seek to compensate aggrieved airlines by other means to allow the airframer to spread the impact of compensation costs over a number of years, for example offering discounts on future aircraft orders or providing extended or enhanced maintenance support. However, it is likely that some airlines will still hold out for the cash, particularly as that is the commodity that airlines most crave and require to keep trading.

The value and legal complexity of aircraft supply contracts does not lend itself to detailed explanation in a short blog such as this and the sheer numbers at stake may make certain legal solutions unworkable. At an outline legal level at least, I mused as to what could be learned from the airframer-airline relationship and what other businesses in the aerospace sector can do to limit the losses that both supplier and customer may suffer as a result of late deliveries.

The difficulty is striking the balance of a fair and reasonable contract that will limit a manufacturer’s liability for delay but actually be accepted by customers where timely delivery is of real economic importance.

Delays due to acts of God, war, civil insurrection, natural disasters and other similar circumstances beyond a manufacturer’s control are commonly excluded as grounds giving rise to liability on the manufacturer’s part, i.e. “excusable delays”. Customers should however be careful to ensure that all such circumstances giving rise to an excusable delay are truly outside the scope of the manufacturer, for example, strikes or workplace disruption by the manufacturer’s own employees should not amount to an excusable delay. Supply chain problems and material shortages have previously been seen to cause delays to projects so end manufacturers, I am sure, would want to limit their culpability for these issues, whilst a customer might rightly expect for these issues to have been envisaged and prepared for by the expert manufacturer.

Manufacturers or suppliers will also commonly seek to limit the scope of damages or compensation payable to a customer and will not want to be responsible for things such as the customer’s loss of profit, loss of goodwill, loss of business, loss of business opportunity or other consequential damage – all categories that I imagine an airline would seek to claim under for late delivery, even given the perhaps slightly esoteric calculations that would ensue.

Agreed liquidated damages, i.e. a finite sum payable per period of delay, may be a sensible measure of compromise, where both sides have agreed at the outset the levels of compensation payable for late delays. Some care must however be taken in certain jurisdictions to ensure that these damages amount to a genuine pre-estimate of the likely loss to be sustained by the recipient. Stray too far beyond this level and the provision could amount to a penalty, the danger being that a court may not enforce it.

From the airline’s perspective, the best advice could be to build slack into the expected delivery date – rather like the scheduled arrival time of one of their flights – so that there is some in-built delay accounted for. Some flexibility should be built into leases or remaining time on the existing fleet because it is often far harder to source new aircraft to fill a gap than to keep the existing fleet flying for a few months longer.

Whatever the terms of the agreements between the airframers and the carriers, the airframers do recognise their culpability in late deliveries and the impact on their customers. Whilst the sums at stake are eye-wateringly large it would appear, despite the sabre rattling of many carriers, that compromise, rather than litigation, is often the best option – and that must be my ‘take home’ message from this blog!

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