Boeing Goes From Humble to High-Fives With Showstopper Max Deal
The U.S. company couldn’t have hoped for a stronger endorsement to win back trust from wavering customers and a jittery public.
(Bloomberg) -- The Paris Air Show is typically an Airbus SE stronghold, where the European company unveils its biggest orders, relegating Boeing Co. to bit player.
This year was shaping up to be particularly difficult for the U.S. manufacturer, which is reeling from two deadly crashes that grounded its all-important 737 Max jet. Chief Executive Officer Dennis Muilenburg came to the event with a focus on “humility and learning” rather than chasing deals.
That was until the second day, when Boeing managed to pull off a stunning turnaround with the help of one of the world’s most respected airlines. British Airways owner IAG SA signed a letter of intent for 200 of the single-aisle Max planes, in a commitment valued at $24 billion that gives Boeing the opportunity to turn around the negative narrative surrounding its biggest source of profit.
Captain Walsh
The U.S. company couldn’t have hoped for a stronger endorsement to win back trust from wavering customers and a jittery public. IAG CEO Willie Walsh -- himself a former 737 pilot -- personally vouched for the Max, saying that he’d board one himself if he could and that he had been on a simulator to run through Boeing’s proposed changes. It’s among the biggest orders ever placed for a single-aisle model in Europe, and IAG is essentially building the future of its low-cost operations, including Level and Vueling brands, around the Max.
“Both sides get something great: Boeing gets an incredibly well timed endorsement and IAG gets to buy planes at a very heavy discount, probably, with no risk,” said Richard Aboulafia, vice president at the Teal Group, a Fairfax, Virginia-based aviation consulting firm.
While the Chicago-based manufacturer had drawn a blank on the opening day (and watched Airbus pull in $13 billion in deals), Tuesday began more upbeat for Boeing. It landed an order for 20 787 Dreamliners from Korean Air Lines, before the crescendo from IAG, marking the first commercial endorsement for the Max since the grounding.
Hugs All Around
Negotiations came down to the wire, and it wasn’t clear until Tuesday afternoon that Boeing would clinch the sale, according to a person with knowledge of the matter. Airbus was blindsided, unaware of the talks or even the IAG requirement, another person said. After Walsh penned a contract with Boeing commercial airplanes chief Kevin McAllister, Boeing staffers high-fived each other and hugged. McAllister said he was “truly honored and humbled” by Walsh’s endorsement.
The backing from IAG also bolsters Muilenburg’s bet to stick with the Max as the cornerstone of Boeing’s short-haul strategy. The CEO has dismissed the notion that Boeing may be forced to fast-track development of an all-new single-aisle model because of the risk that the Max, in its fourth month of grounding, turns out to be mortally wounded. Instead, Muilenburg said, the Max would remain for decades to come, until technology has matured sufficiently to justify the huge investments needed for a brand-new model.
Still, Boeing has kept the door open to a Max name change if it becomes necessary given its link to the tragedies. IAG, for its part, didn’t mention the Max name in its release announcing the commitment, referring to it instead as the 737-8 and 737-10 aircraft.
Likely Discounts
While Airbus and Boeing readily provide nominal values of orders based on list prices, the actual money changing hands for jetliners is a closely guarded industry secret. Given the pressure on Boeing to secure a marquee order, IAG is likely to have locked in a good deal, with the added benefit that big orders tend to come with steeper discounts. Opting for a letter of intent rather than a firm order contract also gives IAG an insurance policy of sorts for a jetliner whose immediate future is still uncertain, Aboulafia said.
Muilenburg said he’s confident the Max will return to service before the end of the year. The grounding was enforced globally after the second crash of a 737 Max in March, following a previous disaster in Indonesia in October. In both cases, a software system received erroneous readings from a sensor, repeatedly forcing the nose of the planes down until pilots lost control. Boeing has vowed to undertake a deep review of the plane’s design, as well as its certification and communication procedures.
Walsh, an Irishman with a buzz-cut hairdo and a reputation of a no-nonsense corporate leader, said he gained confidence in the Max during sessions on the flight simulator. Those included a version with a software update Boeing is preparing for the Maneuvering Characteristics Augmentation System, which was implicated in the crashes.
“It was very helpful to see it in operation and understand the changes Boeing were proposing,” Walsh said.
Short-Haul Fleet
The Max is arguably Boeing’s single-most important aircraft, competing with the Airbus A320neo family. Years ago, Airbus was first to come out with an upgraded version of its best-selling short-haul model, rapidly picking up huge orders -- including from some marquee Boeing customers -- and essentially forcing the U.S. company to respond. Boeing managed to come back and secure more than 4,000 orders for the Max, thanks to a promise of major fuel-cost savings from new engines and improved aeronautics.
Winning Walsh also gives Boeing the satisfaction of converting a loyal Airbus customer. While the company has a mixed fleet on long-haul routes, consisting of 787 Dreamliners, Airbus A350s and some A380 doubledeckers, it flies no Boeing models on short-haul, having built that operation entirely around Airbus and some smaller Embraer aircraft.
IAG ordered a mix of the 737 Max 8, which seats as many as 178 passengers in a two-class configuration, and the larger 737 Max 10, with room for about 230 passengers, and will use the plane predominantly for its Vueling and Level low-cost operations, as well as its British Airways fleet serving London Gatwick airport. IAG also owns Spain’s Iberia as well as Aer Lingus.
The Max remains a rare species in Europe, with only a few airlines so far flying the latest upgrade of Boeing’s workhorse, first introduced in the 1960s. Low-cost specialist Ryanair Holdings Plc was previously the biggest Max buyer in Europe, with a commitment for 135 units. Globally, Dallas-based Southwest Airlines Co. is the biggest customer, with 280 on its order books.
“I wouldn’t ask anybody to do something I wouldn’t do myself,” Walsh, who flew 737 jets for about 18 years, told reporters at the Paris Air Show. “If you ask me, I would get on board a Max tomorrow.”
To contact the reporters on this story: Benedikt Kammel in Berlin at bkammel@bloomberg.net;Julie Johnsson in Chicago at jjohnsson@bloomberg.net;Benjamin Katz in London at bkatz38@bloomberg.net
To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net;Brendan Case at bcase4@bloomberg.net
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