How did Boeing win the Air Canada mainline 150-200 seat jet order when only a couple of weeks ago Flight Global reported the Airbus won the deal?
We, too, heard that Airbus seemed to be the favorite, but the information was soft. We’re not rapping Flight Global—undoubtedly it was confident in its sourcing, but this just shows that a situation can change dramatically and quickly.
We’ve been following the competition for months, behind the scenes, and here are factors we understood that were involved.
The future of the Embraer E-190 fleet played a bigger role in this deal than might be apparent, even from Air Canada’s press release:
Air Canada continues to evaluate the potential replacement of its Embraer E190 fleet with more cost efficient, larger narrowbody aircraft that are better suited to its current and future network strategy. Consistent with this strategy, the agreement with Boeing provides for Boeing to purchase up to 20 of the 45 Embraer E190 aircraft currently in Air Canada’s fleet. The E190 aircraft exiting the fleet will be initially replaced with larger narrowbody leased aircraft until the airline takes delivery of the Boeing 737 MAX aircraft. The company will be reviewing various options over the next six months for the remaining 25 Embraer E190 aircraft including continuing to operate them or replacing them with a yet to be determined number of aircraft in the 100 to 150 seat range.
According to Market Intelligence, Air Canada has been unhappy with the maintenance costs of the E-190, principally focused on the GE CF34 engines. JetBlue, another E-190 operator, has cited engine maintenance costs in its SEC federal filings as an area of concern. Air Canada uses the E-Jets on some routes that push the range–Toronto-Seattle, for example–and on rare occasions, a tech stop in Montana on this route is required, Air Canada gate agents told us.
Disposing of the E-Jets presented a problem, however: Current Market Values for the planes are said to be substantially below book value, presenting Air Canada with a potentially large one-time write off if the right deal wasn’t structured. But the prospect of Airbus or Boeing taking the airplanes in on trade presented a problem for the buyer, too. Appraisers and lessors we consulted told us that the market for used E-Jets is soft, with lease rates or resale values reflecting this, making it difficult for the buyer to make a financially sound deal.
Embraer did not return a call and email seeking comment.
The Embraer issues didn’t stop with those described above. GE is the engine supplier, and there are believed to be commercially-based engine maintenance contracts associated with the CF34s. GE and CFM are also the engine providers on all but a small number of Air Canada’s jets. Maintenance agreements are likely involved as well. GE Capital Corp. finances a number of the mainline jets.
All this GE pollinization enables GE to offer a “global” deal in connection with a Boeing 737 deal. Maintenance agreements could be altered. Financing rates could be reset.
Airbus vs Boeing
But CFM supplies engines on the A320neo, too, so couldn’t CFM have wheeled and dealed on this, too?
Of course, it could. But if Boeing wins the deal, CFM is 100% assured of getting the engine order. If Airbus wins, there is a competition with Pratt & Whitney and only a 50-50 chance of a win. Some Airbus officials bitterly complain about what they perceive is a bias by CFM to favor Boeing in competitions as a result. But some at Boeing believe CFM’s exclusivity on the 737 is a doubled-edged sword. It makes a good argument for residual values and for lessors continually faced with remarketing over the life of the airplane (one engine type vs two). At the same time these officials also believe it is harder for the Boeing sales force to muscle CFM into stepping up and contributing to financial concessions, leaving Boeing with the disproportionate burden.
Did the 787 delays play a role?
Air Canada has 37 787s on order, and it’s been negatively affected by years of delays, just as every other customer has. As we’ve written many times, compensation by Boeing could come in many forms: cash, rate breaks on maintenance, spare parts and training and discounts on 787s—or other aircraft types. If we were betting, we’d believe compensation played a role in the negotiations not only for the 737s but also prospectively for the E-190 trade-ins.
Airbus says Boeing won this on price.
What of Bombardier?
Air Canada kept open consideration about the future of the remaining 25 E-190s. As noted above, AC could retain the aircraft. Or it could replace them with the Boeing 737-7, the Bombardier CSeries or presumably the Embraer E-Jet E2.
GE will undoubtedly be a factor with respect to maintenance contracts on the CF34s in any analysis to retain the airplanes. The same would be true for the prospect of acquiring the 737-7, which is powered by the CFM LEAP-1B.
The same issues outlined above relating to the prospective trade-in would face Boeing and Bombardier. AC is already widely viewed as a must-win for Bombardier because AC is figuratively across the street from Bombardier. How aggressive will BBD be, which is known for being notoriously unwilling to cut pricing or provide other steep concessions? How willing will Pratt & Whitney, the CSeries engine provider, be to step up? After all, Pratt & Whitney Canada is actually building the GTF engines for the CSeries.
Finally, how aggressive will Boeing and CFM be to prevent a sale by BBD and PW to Air Canada?
A decision is slated for the first quarter.