In March, United Airlines announced it had done a deal with Boeing for 25 more 737-700s after its January deal for 40.  This deal was hotly contested by Bombardier for its CSeries.  The Boeing selection was a blow to Bombardier, but also seen as Boeing playing a weak hand .  United had both OEMs on the run.

Now United has decided to defer 61 737s, it is going to save $1.6Bn in capex. United further noted it will convert these 737-700s into four -800s and MAX9s.  The 61 deferrals at $1.6Bn equates to $26m per aircraft.  This was the general understanding of the price level Bombardier was facing off against when trying to sell United the CS300.  We understand the airline operations people preferred the CS300 to the 737-700, but the financial people were looking at the killer Boeing offering.  Finance won.

Now here we are.  United has played Boeing again; the deferral news drove Boeing’s stock down 1.3%.  Concerns are that Boeing plans to increase 737 production are impacted.  Boeing says its plans are not impacted by the United decision.

There is another aspect to this news – is Boeing going to get United to pay any more for the larger aircraft? There is no mention of fewer than 61 aircraft in the future. the larger MAX is much more expensive than the NG.  We suspect United will not pay much more, because getting money out of an airline is very difficult.  The -700 orders were clearly offered at a massive to keep the current production line moving before the transition to MAX.  That backlog has suddenly disappeared with the deferral – more than one month’s production that Boeing will need to back fill.

United’s gaming its orders looks bleak for Boeing.  Securing a MAX9 for $26m?  Even if the order had a clause to change aircraft price adjustments, they couldn’t proportionally be far from this heavily discounted baseline.  This can’t be good for business, which may be why Wall Street reacted and Boeing’s stock is down on this news.

If United can do this, what can we expect from Delta?  They must be looking at this situation and reviewing their own orders. After all, they too are seeing capacity growth as a threat. Might they push Boeing for the same type of swap? If so, more Boeing stock hits are coming.  As long as fuel prices remain low, the economics of keeping older aircraft are more attractive.

Bombardier must be laughing.  They have not lost anything with United, having won at Delta Air Canada.  So if United were to come back to them now, the airline would be paying more than $26m per aircraft.  Since United is up-sizing their order, there is still an opportunity for them with a “right sized” aircraft for some markets.  Meanwhile, Boeing is going to end up paying even more in terms of discounts for the order they “bought” back in March.

Is the narrow-body bubble finally beginning to burst?  The first slow leaks are becoming apparent.

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