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, and 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. And 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 discount 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 and 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 American and 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 and 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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“Bombardier must be laughing,having won at Delta and Air Canada”. I am sure those sold to Delta were sold at rock bottom prices,perhaps even at a loss just to have a major carrier on the order list. United will pay more for the larger frames, how much, who knows? It would be foolish to think the price offered for the 737-700NG would hold for the 737-800 and MAX series. The MAX will offer better fuel burn and as such will command a higher price. Boeing is not stupid having been in the game for decades and having a large backlog of production.
Way too much is being made of the up-gauging of orders at United. Both Boeing and Airbus will do what they need to do to keep market share.
Of course the -800 and MAX9 pricing won’t be the same as the original -700 deal. What we are saying is that whatever pricing Boeing and United negotiate starts from a very low level based on the -700 deal. Starting from such a low base means it has to be tough for Boeing. We think Boeing wants the up-gauging but we can’t see them getting the pricing they want.
“There is another aspect to this news. Is Boeing going to get United to pay more for the larger aircraft?”
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I don’t even consider that a question. The MAX9 costs more to produce. It has a higher market value. Deferral reduces net present value for a nominally equal price.
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There is no reason to think Boeing signed a contract to sell United whatever 737 they wanted for $26 million a frame (or was it $22 million a frame, $26 million with engines, as per the original rumor?). They signed a contract for 737-700’s. There’s no reason to even bother discussing that much.
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However, having already committed to an extremely low price for 737-700’s because they perceived an extremely close competition with CSeries, Boeing was probably willing to make the switch to the MAX9 at prices that only generate a small amount of additional overall value to Boeing shareholders. I’d be willing to bet United got a better overall deal on the 737-MAX9’s due to the order and then order change tactic than they would have had they been negotiating for MAX9’s all along.
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Which combined with the short time between order and order change makes me wonder if the CSeries was ever actually in the running, or if United used its availability as a tool to negotiate in bad faith with Boeing (and inherently likewise with Bombardier).
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@ Steven – Bombardier already effectively admitted they sold the Delta order at a loss when they booked a $1/2 billion accounting penalty for “onerous contract provisions.”
The onerous contract provisions are based on the expected high cost of ramp of aircraft. I think BBD will be delivering planes to AC and Delta in 2018/2019. Those are the last 2 years of the ramp.