This order was telegraphed a week ago. Even as late as yesterday morning we were hearing from competitors that the race was still on. But United selected Boeing late Thursday when it reported its fourth quarter numbers.   The announcement was terse “Today, UAL announced it reached an agreement to acquire 40 new Boeing 737-700 aircraft which will enter the fleet beginning in mid-2017, replacing a portion of the capacity currently operated by regional partners.”

What does this mean for the small duopoly that fought long and hard for this deal? And are there other implications?

The Selection

  • Bombardier – the miss hurts this company more than any of the competitors for the order. Bombardier had had put in every effort to be a winner with its new C Series. The aircraft impressed some at the airline. But apparently not enough of the key decision-makers were won over. Bombardier was only recently considered a real option. The considered opinion among many industry observers was that a win by Bombardier was, at best, a long shot. Even though its aircraft likely offered United the best economics.
  • Embraer – this OEM was seen as the favorite for a long time. The current United team is heavily influenced by its former employees who have long term excellent relationships with Embraer. Moreover, Embraer has been selling aircraft to United regularly. Perhaps United simply didn’t want to wait for the E2?
  • Airbus – was not seen as runner in this race. Even though United’s Airbus fleet is old, it does not suffer any serious economic challenges with fuel prices at about $1/gallon.   For Airbus United offers interest at single and twin aisle levels. Airbus is probably not too annoyed by this decision.
  • Boeing – this is a very nice win for an aircraft model that has not been getting much market attention. The order looks great on paper but likely came at a massive discount. Boeing can deliver the aircraft fast because its plant is producing two 737s per day. In sheer production terms, Bombardier could never compete with this, no matter how good its aircraft might be. Moreover, United selected the -700 which underscores that they also see at least a medium-term (5 years) period of cheap fuel.

Implications

  • The hill Bombardier has been climbing has suddenly become much steeper. Cheap fuel doesn’t help any of the next generation aircraft that are priced at a premium over current models. Bombardier has an additional challenge; it is completely new. In addition, Bombardier will not be able to deliver at the rates United probably wants aircraft.   Bombardier will now focus on Delta, which some kind remarks about the C Series.
  • Embraer quietly continues to work on its E2. Knowing that post 2018, when its aircraft comes on line, United and others may be facing new challenges for which it will be ready.
  • Airbus also keeps its powder dry. United is already a big customer and has selected the A350. It will probably be back for the A320neo before too long and Airbus will be ready.
  • Boeing gave birth to United Airlines and Pratt & Whitney. Boeing’s history goes way back with United further than any other relationship. We would not be surprised to see United take 777-300ERs at deep discounts also. Boeing is the incumbent at United and, as we have seen, will make any deal it has to, to remain critical to the airline.

Other Considerations

  • We have been writing a lot about the impact of cheaper oil lately. We see the United selection as part of the outcome of cheaper oil. United selected a current generation technology aircraft because, quite simply, at current fuel prices the numbers work. Especially at a deep discount and fast delivery.
  • The big order Republic Airways has with Bombardier needs to be drawing more attention. Both the customer and OEM know this delivery will not happen. It is an important issue to figure out what happens next. Does Delta make Republic a deal it cannot refuse?
  • Regional airlines are going to get squeezed some more. Because the new generation are overweight by scope clause. The network airlines are quite likely to follow United’s lead and buy these aircraft for operation by their own pilots. The economic squeeze of high fuel prices is over for the foreseeable future. Network airlines could operate these jets efficiently – particularly since load factors are so high as the airline oligopoly holds the line on capacity (and fares).

Bottom Line

Low fuel prices aren’t favorable to new aircraft programs, particularly for new technology aircraft like the C Series that have not yet reached maturity in its airframe and engine operations. By choosing an existing aircraft that fits within United’s existing fleet, it avoids transition costs like pilot and initial provisioning, avoids potential during the teething period for a new aircraft, and is able to more quickly integrate aircraft into its fleet.

In an environment with $1.00 rather than $3.25 fuel, and Boeing having ample capacity to deliver aircraft quickly, Bombardier would have needed to discount their plane likely below to win the deal. Boeing could incrementally price its aircraft to fill the remaining gaps in the 737NG production line prior to the transition to MAX, and offer these aircraft at prices much lower than Bombardier could match.

There is no question that Airbus and Boeing don’t want a third player growing into their market, and know that Bombardier is the master of the stretch and before too long, a CS500 and CS700 could appear. The net result is despite the CS300 being a much better airplane than the 737-700NG, both economically and from a passenger preference standpoint, Boeing them “an offer they couldn’t refuse.”  As the chart demonstrates, the 737-700 has attracted minimal attention for a long time.  Which is what makes the United order all the more attention grabbing.

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Finally the news may also indicate there is unfinished business.  Take a look at this story from last October.  A key item here is this: “United Airlines plans to order a fleet of 100-seat jetliners from either Bombardier Inc. or Embraer SA if it can agree on terms for a two-year contract extension with pilots in expedited bargaining.”

The 737-700 is NOT a 100-seater.  It competes with the CS300 which it beat for this deal.  But United was looking for 100-seat aircraft.  When asked about this early this morning, United responded “We continue to work with all of our manufacturers on our fleet needs. These aircraft are specifically meant to decrease our reliance on the 50-seat aircraft.”  Based on this comment and seeing the linked story above it could mean the Boeing order eclipses the original 100-seat interest. (As of this writing, Boeing has not confirmed the United deal)

However note the headline in the linked story.  United was looking for 100 new airplanes.  The 100 seats and 100 airplanes are easy to confuse.  We suggest there is unfinished business with respect to United’s fleet planning in this segment.

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