MAX gets cheaper for airlines and the cost for Boeing rises

The IAG order for 100+100 MAXs at the Paris show caught everyone by surprise, even though the news was telegraphed. The IAG order has implications that make it more expensive than it initially seems. There are two sources we are aware of that whisper IAG got a discount in excess of 70%. This may be a circular rumor going around the industry. Boeing's list prices are found here. Take a look at what a 70% discount means if the concessions were all cash. It is likely that certain services might be included in the deal that generates more up front cash to Boeing but is discounted over time, resulting in a higher price for the aircraft and lower future costs from Boeing Global Services. Deals have gotten more complicated with the inclusion of services, and low transparency has turned even more opaque. It is eye-popping. IAG got a steal, but the real impact is not from this one deal. The Air Current reported Boeing has an understanding dating back to Herb Kelleher's days that Southwest will never pay more for a 737 than any other customer. This understanding might be tested now. It is generally understood that IAG got the order at bargain-basement pricing. Which is to say quite likely at levels that earlier customers were not offered. After all, the earlier orders came when the MAX was selling like hot cakes. Boeing would have had pricing power. When IAG placed its order, Boeing had far less pricing power. With Boeing services now actively involved in deals, what is included in the price of the aircraft and which is discounted services may be the issue to avoid “most favored customer” deals needing price adjustments. There is the airplane and then the high-value service contracts that come with it today at Boeing. Southwest has 30 MAXs and another 250 to be delivered. It is highly likely that these aircraft are being repriced by the airline. Whether Boeing writes the airline a check isn't clear - but the remaining orders will be at lower prices and likely will be discounted further to make up for the first 30. It gets worse. Almost certainly American, United and Ryanair have the same re-pricing thought in mind. As might GOL. That means, just looking at these airlines, 44 deliveries to date are likely getting repriced. And then the remaining 507 to be delivered as well. These details are clearly not being made public. Perhaps IAG got services for nearly free, but the airplane itself was more expensive – resulting in a net +70% discount - but the nominal price is likely the most favored with current escalations price. BGS enables a lot of interesting options that could effectively negate the MFN pricing – paying 5% of normal for a few years of spares or MRO can go a long way in lowering lifecycle total costs to the airline from the list price for both aircraft and services. The IAG deal, therefore, is rich with pricing flexibility once one factors in BGS. This creative pricing is understood by other MAX customers, so all of them are making visits or calls for their new pricing. IAG's deal may have set a new (low) roof on MAX prices. Boeing will need to be sharp with its BGS to claw money back. The IAG deal was clearly an exception as Boeing's MAX is grounded and Boeing needed a credible brand to stand up for it. But there is still some risk - will passengers forget about the MAX brand and fly it anyway? UBS analyst Myles Walton has kept his "Buy" rating and $500 price target on Boeing, telling investors that a survey conducted by UBS Evidence Lab recorded "some improvement in sentiment around consumers' willingness to fly on a 737 MAX." But today there was more bad news on the MAX. Passenger sentiment may not be as resilient as UBS thinking in an age of social media and its ability to constantly remind travelers of the MAX. We are in unchartered territory here. Meanwhile, Airbus is likely seeing pricing power on the A321 firm as demand rises. Boeing's MAX woes are not just about pricing. There are airline compensation costs for the grounding. Then there are the lawsuits. Which means that Boeing's ability to recover its development costs (estimated at under $2bn) may have to stretch out longer than originally planned. With over 4,000 orders in the backlog, recovery costs could be around $500,000 per aircraft. Boeing now faces a situation where it needs to sell even more MAXs to try to recoup these costs. And airlines are expecting to get these aircraft for around $35m apiece. One has to wonder how quickly Boeing can recover its costs before the next generation of single-aisles is announced around 2030. How likely is it that the Boeing board will now approve the NMA? Especially if the MAX costs keep growing and may go over $10Bn - essentially the cost of a new program? If Airbus is able to announce its own next-generation before 2030, this could force Boeing to react again as did to the A320neo. It may suit Airbus to accelerate this process as it squeezes the MAX further, giving Boeing less time to recover.

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