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Boeing Set to Pay Hefty Compensations to Airline Companies

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The year 2019 has been a disappointing one for Boeing’s (BA - Free Report) commercial business, which received a severe blow after its best-selling 737 Max planes were grounded in March, following two crashes claiming 346 lives. A production rate cut for these jets announced last April followed by the eventual suspension of production in December came as another jolt.

The unfavorable turn out of events kept Boeing under immense pressure, affecting the airlines industry as well. This is because when more than 700 of Boeing’s 737 Max planes were grounded worldwide last March, airlines with a large number of 737 Max jets in their fleet started to incur significant losses.

Will Airlines Recover the Losses?

Per a report by U.K.-based flight data information firm OAG, Boeing’s 737 Max grounding is estimated to have hurt global airline industry revenues by $4.1 billion in 2019, including a cumulative loss of $600 million of three U.S. airlines.

Since the actual numbers of 2019 have not been released so far, we are yet to ascertain how far the estimation is appropriate.  Nevertheless, Boeing’s airline customers have demanded a compensation to recover the losses they have been incurring since the 737 Max grounding.

To this end, it is imperative to mention that last July Boeing took a $4.9-billion charge into account for paying the compensation. Moreover, the company has designated $6.1 billion to pay airliners through a combination of cash, discounts and other benefits, per a report by The Wall Street Journal.

Once Boeing starts paying these compensations, we may expect the affected airline stocks to gradually benefit, over time.

3 US-Based Airlines to Receive Compensation

Southwest Airlines (LUV - Free Report) , which currently is the biggest customer of the 737 MAX aircraft, is entitled to receive a compensation for some of the financial damages incurred owing to the grounding. Although the terms of the agreement have been kept under wraps, we expect Boeing to cough up a heavy sum to the Dallas-based airliner.

American Airlines Group (AAL - Free Report) has also entered into a confidential agreement with Boeing in January, wherein it will receive compensation for several years. American Airlines has however disclosed plan of distributing more than $30 million of the money among its employees via its 2019 profit-sharing program.

Per a report by Reuters, United Airlines (UAL - Free Report) has extended cancellations of Boeing 737 MAX flights from early March until June 2020. United Airlines is yet to reveal how much the 737 MAX grounding has costed the carrier, but we may expect the compensation to be a huge one.

Other Airline Companies Seeking Compensation

Per a report published by Simple Flying, carries such as Ryanair, AeroMexico, Icelandair and Norwegian Airlines seem to be progressing with the compensation discussions with Boeing.

Recently, Boeing agreed to pay damages to Turkish Airlines for losses caused by the grounded and undelivered Boeing 737 Max aircraft. Per Turkey's Hurriyet newspaper, the total compensation Turkish Airlines would receive amounts to $225 million.

As Boeing will soon release its fourth quarterly and full-year 2019 financial results, we expect to get an idea of the extent of damage these compensation charges have had on its results.

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