$30m for the Airbus, Boeing at American: Wells Fargo

Update, July 26: Wells Fargo issued this update today:

American Airlines Pricing Update. On July 26 we heard from American Airlines regarding our calculation that the average price it is paying for reengined A320s and 737s is around $30M (ex-escalation: $27M). We now understand that the airline’s $10.3B projected Q3-ending purchase commitment balance excludes the 100 re-engined 737s but includes pre-delivery deposits (PDPs) for 230 aircraft (100 737NGs + 130 A320s) to be leased. Based on this new information, we can estimate an A320neo unit purchase price based on an assumed PDP level. Assuming a 20% PDP rate, the estimated implied unit price per new A320neo would be $40M (ex-escalation: $35M). Assuming a 30% PDP rate, the estimated implied price would be $35M (ex-escalation: $31M).

Original Post:

We were traveling last week and didn’t pick up on this-but here’s what Commercial Aviation Online reported about the purchase price of the Airbus and Boeing orders by American Airlines.

This is entirely consistent with the pricing we heard in advance of the deal.

AMR’s re-engined narrowbodies price below $30m: Wells Fargo

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Date: 22/07/2011 11:40
Source: Commercial Aviation Online
Location: London
By: Laura Mueller

A regulatory filing suggests American Airlines’ purchase price for the Airbus A320neo and re-engined Boeing 737 could be lower than today’s market value for current generation narrowbody assets, according to Wells Fargo research.

Based on the research firm’s analysis, which relies on American Airlines’ 10-Q filing with the US Securities and Exchange Commission on 20 July- “the average re-engined narrowbody price could be about $30 million”.

Assuming 1.5% annual price escalation, this translates to an “average current-dollar price of less than $27 million, or one-third below today’s market values for current generation 737s and A320s”, adds Wells Fargo.

Airbus, American and Boeing have not confirmed the findings.

Wells Fargo notes launch customers generally get preferential pricing; however should other airline customers “strike agreements with Boeing and Airbus at similarly low pricing”, it may mean the “peak margin potential” the research firm assumes for Boeing Commercial Airplanes “could prove more challenging”.

 

27 Comments on “$30m for the Airbus, Boeing at American: Wells Fargo

  1. That’s less than 50% of the list price, doesn’t that sound a bit too low?

  2. Considering that Airbus allegedly (according to Boeing) sold A319s to EasyJet for less than $20m, this isn’t bad! 🙂

    Uwe :
    How much cost cutting potential can be had from raising production output ( for Airbus, for Boeing )?

    I had the same thought… However from Airbus’ point of view, making great profit isn’t necessarily an objective here (bearing in mind their investment into NEO is next to nothing, that’s already paid off). Getting their frames into a Boeing dominated fleet is. I am sure in the long run they will make plenty from spares and support. Just like Boeing will from their tanker adventure.

  3. Also, the OEMs sell more than just the frames….The low cost should be put in context of the complete package – parts, servicing, training, etc.

  4. The “LAST MINUTE” offer at AA from GE and Boeing, to rescue their
    respective engine/aircraft programs, will provide both companies with the
    following significant advantages:
    1. The 737RE, having the lightest structure of the two, will continue to have
    a significant advantage over the A320NEO, assuming both will end up
    with equally fuel efficient engines.
    2. The main point to remember, is the fact that had GE NOT OFFERED the
    reduced-fan-diameter version of their slow-selling LEAP-X engine at the
    last minute, the 737 may well have “faded away” this decade, because
    an all new and NE powered 737 airplane, is NOT a realistic possibility for
    Boeing for some time, given the 787/747-8 problems, the possible need
    for a 777 revamp/new airplane, to face up to the A350 etc..
    3. Also, a huge advantage for the 737NE, in spite of it being late on the
    market, is the fact that Airbus cannot handle this huge market by itself!

    • Rudy Hillinga :

      1. The 737RE, having the lightest structure of the two, will continue to have
      a significant advantage over the A320NEO

      Are you serious? NEO has over 1000 sales, RE hasn’t even been launched yet! If you refer to the old engine frames, then the sales, deliveries and the backlog say otherwise.

      Rudy Hillinga :

      … an all new and NE powered 737 airplane, is NOT a realistic possibility for
      Boeing for some time, given…

      And yet you have been calling for it to happen up to 5 minutes before the AA announcement.

      Rudy Hillinga :

      3. Also, a huge advantage for the 737NE, in spite of it being late on the
      market, is the fact that Airbus cannot handle this huge market by itself!

      Beside the fact that Boeing will be 3 years late to the party, what will be driving the availability of the new frames are the engine OEMs.

  5. Rudy Hillinga :
    The “LAST MINUTE” offer at AA from GE and Boeing, to rescue their
    respective engine/aircraft programs, will provide both companies with the
    following significant advantages:
    1. The 737RE, having the lightest structure of the two, will continue to have
    a significant advantage over the A320NEO, assuming both will end up
    with equally fuel efficient engines.

    Significant? Market says otherwise…

    Rudy Hillinga :
    2. The main point to remember, is the fact that had GE NOT OFFERED the
    reduced-fan-diameter version of their slow-selling LEAP-X engine at the
    last minute, the 737 may well have “faded away” this decade, because
    an all new and NE powered 737 airplane, is NOT a realistic possibility for
    Boeing for some time, given the 787/747-8 problems, the possible need
    for a 777 revamp/new airplane, to face up to the A350 etc..

    LEAP-X had a slow start, but if you compare numbers, you’d see it doesn’t sell slowly at all.

    Rudy Hillinga :
    3. Also, a huge advantage for the 737NE, in spite of it being late on the
    market, is the fact that Airbus cannot handle this huge market by itself!

    How can that only be an “advantage” for Boeing but not for Airbus? I don’t think Boeing can “handle this huge market by itself” either…

  6. Gentlemen, that’s a lot of flack, but let me put it another way:
    Yes UKair, “I had been calling for it to happen up to 5 minutes before the
    AA announcement,” because 1, that new 737 airplane, if boeing had been
    able to launch it, would have been a superior a/p compared to the A320
    NEO and 2. davus, yes “significant,” for the same reason why the 737NG
    was able to compete effectively with the A320, both with CFM engines, ever
    since the A320 was launched in the late ’80s. That’s 20+ years!

    The fact that GE, in desperation and at the very last minute, offered the
    reduced-fan-diameter version of their LEAP-X engine, which nobody at GE
    had mentioned as a possibility earlier and was thus considered NOT even
    a possibility, made it possible for Boeing to switch from the all-new to the
    re-engined 737, and offer the highly efficient 737NG airframe with an
    equally efficient engine as the one on the A320NEO, which changed the
    whole picture in favor of Boeing, moving ahead fast with the re-engined
    737, avoid a total loss at AA AND possibly compete effectively with the
    A320NEO again and who knows for how long!
    Another 20 years NO, but until an all new technology airplane appears in
    the 2020s, YES!

    Why the reduced-fan-diameter version of their LEAP-X engine was not
    offered by GE and or persued by Boeing much earlier, based on the
    vertually identical experience with the CFM-56 engine on the 737 in 1981,
    is something only GE and Boeing can, but may NOTt wish to answer!

    • The image presented in the mediascape indicates that the 737 reengine
      is another “Dreamliner”, never to become true in glorious colors as
      advertised.
      Lets see how this materialises.
      If GE just yesterday offered a smaller fan I don*t think Boeing has done
      enough carefull research on the outcome to offer more than a mirage.

      Whats the next waypoint, actually?
      Q2/3 guidance from Boeing on ?Friday?

    • Engine variants do not appear out of the blue. They are carefully studied and considered. I think a more likely scenario was GE providing several options of fan sizes, but Boeing only went for the smaller one, fitting the RE, at the very last minute.

      And, smaller fans, and lower BPR, give higher fuel burn (cause of higher propulsive efficiency). Negative effects such as excessive nacelle drag come into play around BPR 15-18, but I doubt we are there yet.

    • 737NG was able to compete effectively with the A320, both with CFM engines, ever
      since the A320 was launched in the late ’80s. That’s 20+ years!

      The B737NG was effectively competing with the A320 from 1998, when B738 entered service. That’s not 20+ years. There was a reason why Boeing launched the NG to begin with.

      Rudy Hillinga :
      The fact that GE, in desperation and at the very last minute, offered the
      reduced-fan-diameter version of their LEAP-X engine

      Perhaps it was Boeing out of desperation and at the very last minute that persuaded GE to launch the small fan LEAP?

      Rudy Hillinga :
      which changed the whole picture in favor of Boeing, moving ahead fast with the re-engined 737, avoid a total loss at AA AND possibly compete effectively with the
      A320NEO again and who knows for how long!

      Nothing had changed in favor of Boeing yet, other than give their loyal customers, at last, some clarity as to the direction they were taking. They still need to finalise the configuration, decide upon the engine they want to use (!) and get the BOD approval to offer it. That will be later in Q3. I have no doubt that the B737RE will be successful and will just about hold their market share, and it was the right thing to do from the start. It is a pity that what had to happen was AA coming along and literally dragging them off the fence making clear that they are in serious danger screwing up here.

      Rudy Hillinga :
      Why the reduced-fan-diameter version of their LEAP-X engine was not
      offered by GE and or persued by Boeing much earlier

      I will tell you why. Because Boeing was busy telling everybody they had near zero enthusiasm for it from their customers… yet after announcing the intention to launch the RE, their press release said they anticipate many many sales to come. Hmmm…

  7. If there was never a plan to fit the original Leap X onto a 737, one would wonder what it was designed for. Surely a Boeing application would be of paramount importance to the GE business plan.
    We could still be in for a surprise on the 737RE.

  8. UKair
    “I will tell you why. Because Boeing was busy telling everybody they
    had near zero enthusiasm for it from their customers… !”
    That certainly is NEWS to me and many others I am sure!

    I never saw anything like that coming from GE or Boeing, via Leeham
    News and Comments, or in any other form!
    If I had and based on my personal exposure to the SNECMA/GE
    change to a reduced-fan-diameter on the CFM-56 engine at LH in
    1981, which came to late, I certainly would NEVER have championed
    the all new 737NE program and strongly advocated the 737RE program
    from the start.
    Yes, I agree that the LEAP-X powered 737NE program still faces many
    hurdles, but let’s face it, if that engine had NOT come to the service at
    the last minute, one way or another, the record-breaking 737 program
    would have UNNECESSARILY died a natural death, within the next 5-
    10 years!
    Why, because Boeing management underestimated the threat from
    the A320NEO to the 737 much to late and because both GE and
    Boeing managements, failed to recognize early enough, that a
    reduced-fan-diameter new engine could and would be the only cost-
    effective solution to installing the new engine on the 737 WITHOUT
    major and costly structural changes to the airframe!
    Again, can anybody explain to me why, nether Boeing nor GE pre-
    sented the reduced-fan-diameter version of the new engine, as soon
    as the A320NEO orders started rolling in, especially because both co’s
    had to face up to exactly the same challenge 30 years ago and solved
    it with the same solution, which saved the 737 program from a certain
    death at that time and hopefully will do so again today!

  9. Let’s not rewrite history.

    Albaugh, Pilarski & McNerney all communicated there was little interest for a 737 ree-engine, the NEO would be stillborn and the business case for a reengine from Boeing perspective was weak.

    They simply changed their mind under pressure from Airbus & AA (& maybe a few other key customers).

  10. Rudy, I am not going to hunt for the posts, you should be able to do it yourself but there are numerous quotes from Boeing that came out near the beginning of this year, I believe, stating that the business case for re-engining was not really working and customers did not seem to be interested in it. Granted, this was for the full size diameter LEAP-X and GTF engines. Whether GE and Boeing were talking to each other about a smaller fan diameter engine at this time can only be answered by these two companies.

    Let’s face it, a reduced fan diameter is definitely a compromise and will not be as efficient as a larger fan. That is why the engine manufacturers were working on larger fan sizes, for maximum efficiency. What remains to be determined is the amount of reduced perfomance & efficiency of the reduced sized engines.

    As for the topic of this post, I was quite surprised at the estimated sales prices of these aircraft, not to mention the fact that this seems to be standard in the industry. With the engine manufacturers supposedly picking up a large part of the development tab for the A320 NEO, where does that leave Boeing? Would GE be paying for their development as well or does Boeing have to fork out there own money after missing the boat? How much will this affect the bottom line for both companies? Does Boeing have to give the same discount to their other “preferred” customers (assuming they might buy only Boeing in the future)? Does this not put both companies at a negotiating disadvantage with future customers?

    One last thought, how secure is the RE portion of the Boeing order, considering that the 737RE is a highly conceptual project with no firm engine configuration nor an afficial go a head from the Boeing Board of Directors?

  11. having learnt my lesson : -)

    Is the WelsFargo price evaluation inclusive or exclusive the engines?

  12. Mighty God can move mountains and split seas. One thing he cannot do is prevent someone from the US jumping in saying he heard Airbus gave an enormous discount after they scored a major order.

  13. To me it look’s like Mcboeing is in a bit of a binde trying to copy airbus’s partnership.

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