Expectations for the Paris Airshow 2019 are low driven by a combination of recession fears, trade and political excitement and, of course, the problems with Boeing (BA) 737 MAX. When the Boeing 737 MAX was grounded, a platform that we normally see large order ads during air displays became significantly weakened.
In a previous report, we emphasized that there are opportunities for Boeing to win orders for the Boeing 737 MAX, especially an order from Air France-KLM, but that was the big question as the airline would fly to Paris, which took the stage to support the Boeing 737 MAX. Some said Michael O & # 39; Leary, CEO of Ryanair (RYAAY) would be able to take on the role of him as he goes where a big discount can be won. However, it was Willie Walsh, CEO of the airline group IAG, who actually did. It can be considered a surprise, and in this report we explain why as well as something that can point to the start of the Boeing 737 MAX rebranding.
First, look at the numbers. International Airlines Group provided signed for 200 Boeing 737 MAX aircraft, which will be a blend of Boeing 737 MAX 8 and Boeing 737 MAX 10 aircraft. The airline consists of Aer Lingus, British Airways, IAG Cargo, Iberia, Level and Vueling. The aircraft is likely to be located with Vueling and Level, both being low cost airlines and British Airways. The 200 planes are worth between $ 24B and $ 27B for list prices.
In a press release, the International Airlines Group said the following:
- The list price is approx. US $ 117 million for Boeing 737-8 and US 131 million for 737-10.
- The list price is the sum of the flight price list price, the motor option list price and the price of optional functions, against which price concessions are made. IAG has negotiated a substantial discount from the list price.
Interestingly, the International Airlines Group quoted last year's Boeing 737 MAX 8 prize and a list price between the launch price and the current Boeing 737 MAX 10 list price. On negotiations that have been going on for some time, it is unknown. The airline group also added a note that significant discounts are secured. For some, it might have seemed like IAG had suggested that the airline group, under the current circumstances, negotiated large discounts. The fact is, however, that a customer will already get a 50% discount from the jet maker just to show up at the negotiating table. For a potential mega order that one IAG and Boeing agreed cautiously, the discount rises to approx. 60%, bringing the actual selling price closer to $ 9.7B- $ 10.7B. In addition, the airline could have negotiated up to 5-6 percent, as it is an important customer of Airbus for the single-door system.
Now, more interesting is how IAG described Boeing 737 MAX:
The International Airlines Group has signed a letter of intent with Boeing for 200 B737 aircraft to its fleet. LOI is subject to a formal agreement. The mix of 737-8 and 737-10 aircraft would be delivered between 2023 and 2027 and would be powered by CFM Leap engines. It is expected that the aircraft will be used by a number of the Group's airlines, including Vueling, LEVEL plus British Airways at London Gatwick Airport.
As can be seen, the plane was not even directed as a "737 MAX" in the press release. This raises the question of whether we are looking at the start of a rebranding or whether IAG would mention MAX in its press release. Regardless of the press release, all parties involved have continued to approach the aircraft as the Boeing 737 MAX, so there is no closure of any rebranding at all.
Voice for Trust
One reason why this engagement can be considered something strange is of course the timing. That said, Boeing 737 MAX is currently due and partly powered by media reports that are not always accurate. The airline has become more skeptical of a safe return to service for the Boeing 737 MAX. So any airline that would commit to the Boeing 737 MAX on the airshow would increase some eyebrows. At the same time, a commitment to the Boeing 737 MAX can be seen as a great confidence in the troubled Boeing 737 MAX. It should be no surprise that a large airline had to take the stage. A large airline can provide great confidence and because of its size, it is shielded relatively well from any public negativity. The airline is IAG, the third largest airline in Europe and the sixth largest in the world. The airline plans to have the aircraft delivered between 2023 and 2027, which clearly shows that the fleet planning goes beyond what could be months of crisis for a flight program. The airline's CEO also expressed confidence in the Boeing solution for the troubled MCAS system and customer acceptance of the Boeing 737 MAX this year from now.
Important commitment from Airbus customer
The commitment is not only important because of the confidence it radiates, but also because IAG has a strong relationship with Airbus ( OTCPK: EADSF) which is visible in their fleet.
Table 1: One-Way IAG (Source: AeroAnalysis)
The Group's main carriers, British Airways, Aer Lingus, Iberia, Vueling and Level operate an Airbus fleet. There is not a single Boeing 737 in the fleet. So this engagement is a huge gain for Boeing, it seems. However, IAG is not a group that has never used Boeing 737. The last 737 was withdrawn from the group's fleet in 2015. The aircraft was a Boeing 737-400, so IAG sprayed operations of the Boeing 737NG in favor of the Airbus A320neo.
What we see now is that IAG is looking to return to Boeing. There is a fleet of 350 Airbus single-plane aircraft including 320 A320ceo family flights to be replaced while the airline has orders for the A320neo family for 80 aircraft. It leaves a 270 jet replacement to be ordered. With the current preliminary agreement, 200 could go to Boeing, and 70 could go to Airbus. This would give Airbus a fleet of 185 single-flying aircraft in the fleet versus 200 Boeing 737 MAX jets for Boeing. This is the type of diversification that the group seeks to smooth out intense competition between Boeing and Airbus during future sales campaigns. However, there is one thing that should be noted, and although IAG has a size that allows comfortable operation of the Boeing 737 MAX and Airbus A320neo in parallel, this may also be a warning shot to Airbus. After all, the order is of a preliminary nature, and there is a small chance that the airline's group is making a big move now to twist the Airbus arm.
The preliminary agreement announced by Boeing and IAG is a huge one. We had a large airline manager who climbed the stage, which expressed confidence in the Boeing 737 MAX, and it comes from a customer who is currently running an Airbus one-way channel. The main purpose is to diversify with the agreement. It would rub in a more intense competition between Boeing and Airbus, as the airline aims to grow its fleet in the future.
It makes perfect sense. However, this agreement remains at this stage for the time being, and it may well be that the airline declares Airbus. As a Boeing investor, I hope this is more than just exploiting the current weakness of the Boeing 737 MAX. Whether a final purchase agreement will be finalized eventually, it really doesn't matter … At this point, we have a large airline manager who expressed confidence in the Boeing 737 MAX at the aerospace epicenter. That's what is currently making headlines and what people will remember from Paris Airshow 53 rd . Boeing couldn't have wished for anything better.
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Disclosure: I am / we are long BA, EADSF. I wrote this article myself and express my own opinions. I do not receive compensation for it (except from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.