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South Korea bans delivery of Boeing 737 Max as US joins grounding

Thailand rules out new purchases, hurting company's ambitions in Asia

Boeing's new 737 MAX-9 is pictured under construction at their production facility in Renton, Washington, U.S. The company had high hopes for selling the jet in Asia, the world's fastest growing aviation market.   © Reuters

HONG KONG -- The fallout of the Boeing 737 Max 8 crash in Ethiopia spread further Wednesday, with South Korea banning the delivery of new jets of the same model and U.S. President Donald Trump ordering the grounding of the jets, after his aviation regulators refused to do so for days.

South Korean airlines will be banned from accepting delivery of the Boeing jets in the coming weeks if the U.S. aircraft maker does not satisfy authorities over the safety of the airplane after two fatal crashes in recent months.

"We will ban the delivery if security is not guaranteed," South Korea's Transportation Ministry said Wednesday. Local airlines -- including Korean Air, Eastar Jet and T'Way Air -- are all expecting a total of 14 Max 8 jets to be delivered this year, with the first one to be arriving as early as next month.

The statement came as Thai Airways told the Nikkei Asian Review that it would not now consider Boeing's new single-aisle aircraft for its proposed multibillion dollar purchase of 38 passenger jets.

"As we see a lot of problems [with the] 737 Max, we have decided not to choose this model," Sumeth Damrongchaitham, president of Thai Airways International, said in an interview on Wednesday.

The carrier's decision is the first clear sign that safety concerns are beginning to affect sales of the 737 Max in Asia, the world's fastest growing aviation market.

Trump on Wednesday told reporters in the White House that the Federal Aviation Administration will order the grounding of all Boeing 737 Max 8 and Max 9 aircraft in the U.S.

"We are going to be issuing an emergency order of prohibition to ground all flights of the 737 Max 8 and the 737 Max 9 and planes associated with that line," Trump said.

President Donald Trump speaks in the Roosevelt Room of the White House on Wednesday, where he said that the U.S. is issuing an emergency order grounding all Boeing 737 Max 8 and Max 9 aircraft.   © AP

"The FAA is prepared to make an announcement very shortly regarding the new information and physical evidence that we have received from the site, and from other locations and through a couple of other complaints," Trump said, explaining that the decision was based on "new information."

Boeing issued a statement Wednesday supporting the FAA decision to temporarily ground 737 Max operations. "Boeing continues to have full confidence in the safety of the 737 MAX," the company said, but also that it is "supporting this proactive step out of an abundance of caution."

The 737 Max 8 was also involved in the crash of a Lion Air flight in October, when 189 people were killed. Although investigations are ongoing, and no connection has been established, airlines have noted the similarities between the two incidents, which occurred shortly after takeoff.

The 737 Max series is the most advanced narrow-body aircraft that Boeing offers and the Thai national airline's stance indicates that the company may find it harder in future to compete with its European rival Airbus in this market.

Several Asian airlines told the Nikkei Asian Review that they were reviewing or postponing finalization of orders for the Max series, pending more information on the causes of the recent accidents.

An executive from a major Asian airline that recently announced multibillion dollar purchases of the MAX series told Nikkei that his company was "closely watching the outcome, considering any possibilities," including a change in its orders. The executive declined to be named due to the sensitivity of the matter.

In Indonesia, I Wayan Susena, an executive of Garuda Indonesia, said on Wednesday that the company is "currently reviewing" orders for the Max 8. The Indonesian flag carrier has purchased 50 Max 8 jets from Boeing with one jet delivered so far. Managing director of Lion Air group Daniel Kuncoro, said that his airline has also suspended the delivery of four 737 Max 8s due in May

Garuda Indonesia's Boeing 737 Max 8 airplane is seen as it parked at the Garuda Maintenance Facility AeroAsia, at Soekarno-Hatta International airport near Jakarta, Indonesia on Wednesday.   © Reuters

In Taiwan, where Boeing has yet to sell any of its Max series, the barriers to entry have also just risen for the aircraft manufacturer.

"We will adopt a more careful attitude when it comes to [any] new procurement plan and we will follow carefully the investigation of the accidents involving 737 Max," said China Airlines Vice President Jason Liu.

"Reversing an order is not an easy decision to make because it could result in a penalty," said Kotaro Toriumi, an independent aviation analyst. "But airlines that haven't made any firm commitment are likely to give Max more scrutiny."

The U.S. Federal Aviation Administration has demanded that "design changes" to the 737 Max be implemented by April. Boeing said separately it would implement a required "flight control software enhancement" for the 737 Max in the "coming weeks."

Nevertheless, concerns are emerging that if the problems persist, or safety concerns are not sufficiently addressed, Asian airlines may have to rein in their expansion plans. Data from aviation consultancy Capa show that Asian airlines placed more than a quarter of the total 5,526 orders for the Max 8 and 9, listed at $122 million and $129 million, respectively.

"Boeing 737 Max represents one-third of the APAC narrow-body fleet on order. We expect a potential supply shock due to a delay in deliveries in 2019," said Eric Lin, an analyst at investment bank UBS in Hong Kong.

VietJet, Vietnam's leading budget carrier, has ordered 200 Boeing 737 Max aircraft, with the first delivery expected in October. But those plans are now unclear after authorities there said on Wednesday they would "temporarily stop issuing a flying license to Boeing 737 Max aircraft" and ban the jet from Vietnamese airspace.

Similarly, Virgin Australia, which has 30 Max aircraft due in November, "will not introduce any new aircraft to the fleet unless we are completely satisfied with its safety," the company said in a statement on Wednesday. Australia has also suspended the operation of Max 8 jets.

Analysts said many of Asia's smaller carriers were relying on the model for expansion. Its fuel efficiency means it can fly over a greater distance without refueling, so smaller airlines could offer longer routes without having to pay for large passenger jets. For example, South Korea's low cost operator, T'Way Air, was a customer.

"If delivery of Boeing 737 Max ... is delayed, it can undermine growth of T'Way Air which plans to launch four Max airplanes out of six this year," said Kim Yu-hyuk, an analyst at Hanwha Investment & Securities based in Seoul.

A T'Way spokesperson dismissed these concerns, saying, "Nothing has been decided yet whether it is safe or not. And we have some time until the delivery."

A spokesperson for China's Xiamen Airlines, which had 10 Max 8 jets in service, said the company was still "evaluating the impact on their expansion plan." Xiamen Airlines rescheduled more than 100 flights and canceled 13 on Monday after the Civil Aviation Administration of China urged domestic airlines to suspend the use of Max 8 jets.

Likewise, Guangzhou-based China Southern Airlines, China's largest operator of Max 8 jets, said 52 out of 64 scheduled flights were canceled on Monday, affecting around 10,000 passengers.

Asia accounts for roughly a third of the 378 Max aircraft in service, with China operating some 25% of them, according to Capa. At least 126 out of the 145 Boeing 737 Max aircraft operated by APAC airlines were grounded as of Tuesday based on UBS's calculations.

Additional reporting by Nikkei staff writers Kim Jaewon in Seoul, Apornrath Phoonphongphiphat in Bangkok, Mitsuru Obe and Eri Sugiura in Tokyo, Cheng Ting-fang and Lauly Li in Taiwan, Shotaro Tani in Jakarta and Rosemary Marandi in Mumbai and contributing writers Jenny Chen in Hong Kong and Edouard Morton in Melbourne.

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