Boeing's Big 737 Max Win Isn't Only About Orders

Boeing Co. scored a much-needed victory on Thursday when budget airline Ryanair Holdings Plc said it ordered 75 more of the company’s 737 Max jets. But the real triumph is about pricing power — or at least the perception of it.

The deal with Ryanair marks the first large purchase of the Max since the Federal Aviation Administration ended a 20-month grounding of the embattled jet last month. The flying ban was spawned by two fatal crashes of the Max, and Ryanair's willingness to spend anew on the plane is a key step in Boeing's rehabilitation. Most important, it’s a firm order. British Airways owner IAG SA gave Boeing a vote of confidence at last year’s Paris Air Show by signing a letter of intent for 200 of the Max jets, but that agreement has yet to be finalized and may ultimately look different. IAG in May said it was deferring deliveries of 68 Boeing and Airbus SE planes. 

The Max’s many months on the ground give airlines plenty of leeway to renegotiate deliveries or cancel them outright; most have been going that route. Boeing removed more than 1,000 Max jets from its order backlog this year either because of cancellations or because stressed finances at the buyers make them doubtful under accounting rules. Ryanair’s order is unlikely to be the start of a cascade of fresh demand, with most airlines still struggling to find use for the airplanes they already own while business suffers during the pandemic. Of the roughly 450 jets that Boeing built during the grounding but hasn’t yet delivered, nearly a quarter are “white tails” — planes whose original buyers have backed out, so their tails are unmarked by airline logos — Bloomberg News reported.

Against this gloomy backdrop, the proclamation from Ryanair CEO Michael O’Leary — known to be a hard-nosed negotiator when it comes to plane orders — that he received only a “modest” discount on the order is crucial. In essence, it provides a floor for Boeing in future negotiations, at least as far as optics are concerned. 

Boeing's Big 737 Max Win Isn't Only About Orders

The price point for future Max orders has been in question since the plane was first grounded. The outlook was better last year, when travel demand still seemed insatiable and airlines were lamenting the loss of capacity. And because of Boeing and Airbus’s essential duopoly in airplane manufacturing, it wasn’t in the carriers’ interest to give one planemaker a significant upper hand in market share. That dynamic is clearly different today. Airbus has pulled into a comfortable lead in the single-aisle jet market that should be the first to recover from the pandemic slump in travel. But even so, Boeing seems reluctant to chase orders at any price — at least not right now. “We believe strongly in the recovery and therefore, we will stay patient,” Boeing CEO Dave Calhoun said Thursday at a press conference to discuss the Ryanair order. “We don't feel a need to discount our way into the marketplace.”

How “modest” the discount Ryanair received most likely depends on your definition of the word. The order has a list price of $9.4 billion, but discounts of as much as 50% are common (even for planes that haven’t been grounded). Reuters has reported that Ryanair was expected to receive a discount of more than two-thirds. Whatever the discount, it also reflects compensation for the delay in deliveries of Ryanair’s existing Max order and the associated costs incurred, the carrier said. But Ryanair has a reputation for buying planes on the cheap in times of turmoil, something O’Leary hasn’t been shy about advertising in the past. The fact that he was willing to downplay the discount is a huge boost for Boeing, even if from only a public relations standpoint, and positive headlines are priceless. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.

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