“It is way, way too early to determine the effect of the situation in Russia”, Boeing’s Ihssane Mounir, Senior Vice President for Commercial Sales and Marketing, told AirInsight two weeks ago. He might be right, but Boeing’s accounting office has taken a different approach and has labeled some 140 aircraft for Russian customers as ‘uncertain’. Russian worries grow Boeing’s ASC 606 uncertainties.
This has become evident after Boeing disclosed its orders and deliveries for March on its website on April 12. The most significant change is in the number of MAX aircraft that have been added to the so-called ASC 606 Adjustments category. ASC 606 “imposes additional criteria for recognizing contracted backlog with customers beyond the existence of a contract to deliver. (…) Aircraft identified for a specific customer on this site may not necessarily contribute to the totals for backlog and/or other amounts included in our financial statements.” In simple language: it is far from certain that the order is certain and that the aircraft will be delivered.
For the last few years, the number of MAX that was labeled within ASC 606 has been around 730-750, reflecting the uncertainty of deliveries to customers in particular China and Russia, where the type still needs to receive re-certification approval. In February, the number dropped to 686 aircraft, the lowest for some time. But the numbers for March show that Boeing labeled another 130 extra MAX again, bringing the total to 806.
The logical explanation is that Boeing has qualified all aircraft destined for Russian airlines and lessors as unlikely to be delivered. First, the war in Ukraine and the sanctions on Russia forbid the trading of aircraft. Second, the war makes an imminent re-certification of the MAX most unlikely in the short-term and possibly for a very long time as relations have collapsed. Already last August, Aeroflot subsidiary Pobeda canceled its order for twenty MAX 8s with lessors AerCap and SMBC over certification uncertainties.
Checking the list of undelivered MAX for Russian customers, they include the previously reported order for 28 MAX 8s from UTair but also seventeen aircraft that were ordered by Timaero Ireland Ltd for onward lease to VEB Leasing, a subsidiary of the Russian bank that is now blocked by economic sanctions. Back in December 2019, Timaero sued Boeing for $185 million in a Chicago court, stating that Boeing had sold it aircraft (the MAX 8) that were unsafe and wouldn’t be delivered on time. This followed the two fatal MAX accidents in October 2018 and March 2019.
Another Russian bank, Sberbank, through its Irish subsidiary SB Leasing has unfilled orders for fourteen MAX. It is in the same position as Timaero since the sanctions on Russia. The order isn’t on Boeing’s website, with the most recent one showing an order for ten 737-800s in 2017. Sberbank was said to lease the fourteen MAX to Ural Airlines, which had hoped to receive the first one back in 2018.
With these 59 MAX for Russian customers identified, this leaves at least another sixty to seventy elsewhere in the backlog if all 130 additions to the ASC 606 Adjustments are to be considered to be related to Russia, which shouldn’t be the case. Remember that Western lessors had contracts to place MAX 8s with Russian lessors, like Aviation Capital Group (ACG) with S7 Siberia Airlines. It had already delivered one to S7 in October 2018, the same month as the Lion Air crash near Jakarta. That same month, Air Lease Corporation (ALC) delivered the first of nine MAX 8s to Globus Airlines for onward lease to its subsidiary S7.
Five 777Fs also labeled as ‘uncertain’
Elsewhere in the ASC 606 list, another Russian ‘uncertainty’ shows up with the 777. Within the 73 aircraft labeled in this category, five 777Fs have been added in March as orders for Volga-Dnepr and three from other (likely non-Russian) customers. While delivery to Volga-Dnepr is not on the cards for some time, the full freighters are likely to find new customers anytime soon as the demand for them continues to be strong. It will be up to legal issues to determine if the contract can be terminated and Boeing is free to offer them.
Not related to the Russian crisis, Boeing also adjusted the number of 787s on the backlog. The total backlog is now down to 405 from 411, with three added to the ASC 606 sections and three canceled by Air China, CIT Leasing, and Avolon. These cancelations must be related to Boeing defaulting on the deliveries of the Dreamliners as it is still waiting for the FAA to approve re-deliveries of the type following production quality issues that halted them in May 2021. BOC Aviation said last week it hoped to receive its first 787 later this month or in May. Boeing will announce an update on the situation during its Q1 earnings call on April 27.
