What happens when an order gets cancelled for something like this? Does Boeing only begin production after receiving some portion of payment, so that the customer assumes some financial responsibility for the product before it goes into the production pipeline, or could Boeing potentially end up with a bunch of aircraft in production that they end up receiving no compensation for?
Boeing builds 31 737s per month, and has a healthy backorder of several hundred planes.
“What happens when an order gets cancelled for something like this? Does Boeing only begin production after receiving some portion of payment, so that the customer assumes some financial responsibility for the product before it goes into the production pipeline, or could Boeing potentially end up with a bunch of aircraft in production that they end up receiving no compensation for?”
Good questions. I won’t pretend to know everything about customer contracts because that is not where I work, and I also don’t want to divulge to much on a public forum getting me in trouble, but there are provisions in the contracts on cancelations and the compensations the airline have to pay if they cancel firm orders. I’m not even sure if these were firm order cancelations or options cancelations. There is a difference there as well and the news media often gets that wrong. You will have a sale of 30 airplanes with an option of 20 more, and later the airline cancels the optional 20 and you have big headlines in the Seattle Times “airline cancels 20 airplanes”.
Regardless - these airplanes were not in production, very few cancelations ever are, but someplace out in the product skyline , for example 3 from March 2013, 6 from April 2013, another 2 from July and so on. And those holes are filled right away by sliding other customers into their slots or just places to put new orders – and we are getting allot of those. Other airlines are happy to fill those holes, believe me. If we ordered cars this way, made-to-order, and not getting it for nearly two years after placing your order, you would be thrilled if they said, Mr. Rightfighter we have a cancelation so we can give you your car 6 months earlier. It’s like that in this business as well.
Now if we had a trend of cancelations, and huge blocks opening up, and other customers wanting to slide their orders way out, like what happened after 9/11 then I would be worried, but that is not happening. Quite the opposite.
And what happens if an airplane is in production is canceled? And that rarely happens – No Boeing does not eat the cost. It is what we call a white-tail (no customer), and they are often picked up by a Leasing company before they even make it out the door.
“What happens when an order gets cancelled for something like this?”
It depends. But all of these transactions i knew where:
It takes a downpayment for the order.
Downpayments of canceled orders can be shifted to other orders/payments of other orders. This sometimes is also offered by Boeing to get a free slot for a other customer.
Cancel a few 737s and get a 777 for free. But as i said these deals are usually very custom and confidential things, not like the standard offers you get from Ford or GM :-)
The only things that get usually known are orders and cancelations due to required SEC filings.