Can Airbus Wrest United Away from Boeing?

After castigating Boeing during its earnings call, United Airlines CEO Scott Kirby indicated that the company has removed the 737 MAX 10 from United’s fleet plan, and the airline is rethinking its options. While they have not yet canceled their orders for the aircraft, they are in discussions with Airbus, according to our industry sources.  The FAA production limit likely will push any MAX 10 delivery to United so far out that the airline can cancel the deal without penalties. United as the upper hand here.

The problem is that Airbus is sold out for eight years. Airbus would love to make a conquest of a longtime Boeing customer. They are looking for possible ways to make this happen. One way is to increase production at its four narrow-body manufacturing locations in Toulouse, Hamburg, Mobile, and Tianjin. An extra shift could incrementally improve output. Or there is the lessor route.

Another option is to re-work the aircraft delivery skyline. The industry rumor mill is rife with reports that Airbus is looking to “buy back” earlier delivery slots from customers and leasing companies for the A321neo. If it can obtain enough through position trading and ramp production by an additional two aircraft per month, it could make a proposal to United to replace the MAX 10. If that happens, it would be a significant change, as United was once owned by William Boeing, the founder of Boeing and has been closely aligned as a Boeing customer for decades.

United is already a major operator of older A320 aircraft and has ordered, and taken delivery of the A321neo. But that order is not the size of their MAX 10 order. Interestingly, in their 4th quarter reporting, United mentioned that the A321neo has the highest satisfaction ratings of any aircraft in their fleet. Being already familiar with the type provides a key advantage for Airbus, as incremental sales could easily be accomplished, even for a few available slots, to help alleviate delays negatively impacting growth plans.

With 260 MAX 10 aircraft on order and 200 options, United is looking for significant fleet growth and replacement. It is doubtful in the short-term that Airbus could come up with enough airplanes to meet those requirements, but if an airline or lessor wanted to push back orders and make them available to United, Airbus could certainly accommodate their wishes given the high demand for their aircraft. Of course, an appropriate discount for the deferred delivery aircraft would be required to make it a win-win situation.

The A321neo is currently trading at a premium price, while the Boeing MAX series, tainted by the two fatal crashes that killed 346 people and the most recent quality incident that resulted in a decompression, is trading at a significant discount. Moving United away from the MAX may not, given their disappointment and anger with Boeing, require a significant discount since Boeing has lost credibility with customers over its inability to deliver aircraft on time.

Aircraft purchase agreements typically have contractual provisions that are difficult to break, but in this case, with initial MAX 10 orders scheduled to be delivered in 2020 and now not expected until 2025 at the earliest, United has ample grounds to break the contract with Boeing.

The quality issues at Boeing have caused the FAA to take unprecedented actions, including slowing the planned production ramp-ups at Boeing until the quality issues are fully solved. This means that Boeing is stuck at the 38 per month rate for the foreseeable future, and is unlikely to gain permission to increase to planned 42 and 47 rates for late 2024 and early 2025 production. Such a shortfall would delay United deliveries of MAX 10s even further behind schedule.

Complicating the issue is the fact that Boeing is seeking a waiver from the FAA for a known flaw that does not meet current certification criteria. Given the current political climate, it is doubtful that Boeing will obtain the required waiver for the MAX 7 and 10 regarding a known defect.

That known issue is that the Engine Nacelle and Engine Anti-Ice System would be required to avoid overheating. The overheating could weaken the composite material in the engine shroud and presents the potential for an in-flight decompressions should an engine catastrophically fail in flight. This would be similar to two incidents Southwest Airlines experienced with the 737NG series aircraft in which the engine nacelle failed to contain an engine failure, with one incident involving the death of a passenger partially sucked out of the airplane.

As the MAX is the only currently produced airliner without an Engine Indicator and Crew Alerting System, there is no way to alert pilots on the MAX that engine anti-ice systems may have inadvertently been left on and presenting a potential danger. This could increase pilot workload and presents a potential single point of failure on the aircraft, something that should be avoided.

Without that waiver, the MAX 10 certification could easily be delayed until 2026. We believe that is the most likely scenario, with United impacted by further MAX 10 delays and Southwest by MAX 7 delays.

The Bottom Line:
The question now is what will Airbus and United do. Can Airbus come up with enough slots to make an attractive offer to United? Will United cancel the extremely late MAX 10 orders with Boeing? Will Boeing be forced to make United an offer so good that it can’t refuse?

Clearly, over the last five years, the mantle of industry leadership has shifted from Boeing to Airbus. The current industry dynamics, and Boeing’s downfall, could further shift the balance of power in the industry in the direction of Toulouse. Being sold out for eight years is both a blessing and a curse for Airbus, as opportunities to convert long-standing customers from a competitor don’t often occur.

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