Over the past week we had some big news from Delta. First came the much anticipated order for the CSeries. Although it was supposed to be secret, the news leaked. The nature of this order was deeply disruptive and therefore drew more scrutiny than orders usually do. Bombardier
has been in the hunt for an order from the US Big Three since 2011. Since Northwest Airlines was one of the airlines that helped define the CSeries, Bombardier was going to pursue Delta with determination.
When it came, the sigh of relief was heard everywhere except Seattle and Toulouse. Airbus and Boeing do not appreciate Delta’s decision. A duopoly becomes unstable when a third player enters the market. This, of course, suits Delta. But it makes the market far riskier for the OEMs. Bombardier had to buy the deal – something might have done in 2012 at marginally better pricing. The recent United deal for 65 737-700s below $30m each, acted as a guide for this deal. Perspective is helpful here – Bombardier sells the CRJ-900 at a sticker price of $46m and the CS100 retails at $72m. But if the CS100 deal was done at comparable prices to the United 737-700 order, Delta might be paying a similar price the CS100 as it does the CRJ-900! In other words, the CRJ-900 might be selling at ~$289,000 per seat and the CS100 might be selling at ~$227,000 per seat.
Which brings us back to an increasingly unstable market. What are Airbus and Boeing going to do? The obvious solution is to go upmarket. It’s safer there and gets away from being crowded out by Embraer’s forthcoming E2. The A319neo and 737-MAX7 are not competitive with these new competitors. The only way to keep them out is price – as we saw at United. Even for Airbus and Boeing, cutting off your nose to spite your face is not a rational play. The other option is to cut prices to stymie Bombardier and Embraer (and spite your face). It would seem to us, that going upmarket is the better move. This buys time to develop their own clean sheet designs anyway.
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