Dec. 11, 2017, © Leeham Co.: Eyes will watch Atlanta (GA) this week, when the Delta Air Lines Board of Directors decides to award a big order for the re-engined Airbus and Boeing single aisle airplanes.
The Board meeting is believed to be Thursday. At stake: 100 orders and 100 options for either the Airbus A320neo or Boeing 737 MAX families.
I wrote about this last week. Here’s an update.
There are a couple of additional factors to consider that I did not discuss last week.
First is the 737 MAX 10. Although I alluded to how a Boeing win would be a boost for the MAX 10, I didn’t explain why because the reason was obvious: a new order from one of the US Big Three for Boeing’s newest airliner.
What I didn’t pontificate on is the mere presence of the MAX 10 in the 737 family line up.
When Delta last placed a single-aisle order, it was for the A321ceo. At that time, Delta wasn’t interested in either the MAX or the neo, sticking with end-of-line, highly discounted NG and ceo products. Delta previously ordered the 737-900ER. A “737-1000NG” didn’t exist.
In the competition baking off the MAX and neo, however, Boeing now has a directly competitive product to the A321. The 737-900ER, while always bid across from the A321ceo, simply was an inferior airplane. It has fewer seats and airport field performance is inferior.
The MAX 10 still has inferior field performance to the A321neo, but the seating is about the same. If the airport has a 10,000 ft or 12,000 ft runway, the MAX 10’s inferior performance doesn’t really matter.
Then, the question comes down to economics.
Boeing claims the MAX 10 is 5% more economical than the A321neo on seat-mile and trip costs. Airbus says its airplane is up to 10% more economical, depending on the configuration.
LNC’s independent analysis, normalizing configurations and specifications to there is truly an apples-to-apples comparison, concludes the economic differences are in the low single-digits, varying a little depending on whether the GTF or LEAP is on the A321neo.
There is no real advantage for either company on the economics.
Likewise, Airbus and Boeing each boast their airplanes are significantly more economical than the competitor’s aircraft.
Our analysis (and that of others, by the way) shows the differences are, once again, in the low single-digits.
As one of our colleagues likes to say, there is “economic indifference” between Airbus and Boeing.
So, most deals—and this one—come down to commercial terms, all other things being equal.
But as I noted last week, there is the “C Factor” involving Boeing. Its trade complaint about the Bombardier C Series order by Delta, in which the US Department of Commerce preliminarily levied a 300% tariff on importation of the C Series, muddies the waters.
While Delta and Bombardier argue that the subsequent deal in which BBD sold Airbus a 50.1% stake in C Series and the airplane will be assembled in Mobile (AL) renders Boeing’s complaint moot, Boeing counters that this is mere “circumvention” to avoid the tariff, subject to its own penalties. Boeing also argues that “partially assembled” airplane parts (like wings, fuselage sections, etc.) imported would still be subject to tariff.
Unless the US International Trade Commission agrees (or concludes no harm was or will be done to Boeing) in its pending ruling due in February, only appeals will determine the outcome. These, of course, will take years. There’s no guarantee the US ITC will find “no harm” or the case is moot and there’s no guarantee Bombardier and Delta will prevail on appeal if ITC rules against them.
As I noted last week, the question is whether Boeing offered to drop the complaint in exchange for the order or Delta demanded it be dropped. While some suggest that any Boeing offer would be illegal (citing “blackmail”), I don’t look at it this way.
It’s not at all uncommon that parties agree to settle or drop a lawsuit as a condition of some new deal. I don’t see the difference here.
Airbus, of course, has nothing to offer Delta on this issue. Boeing, or Delta, have this card to play.
Last week I also raised the issue of Delta’s potential concern of a customer backlash in Seattle, home of Boeing Commercial Airplanes, should it buy Airbus. Delta is building a hub here in competition with Alaska Airlines, a heretofore exclusive operator of Boeing aircraft. (Alaska’s acquisition of Virgin America, an Airbus operator, muddies these waters for now.)
What I overlooked was the Trump Administration’s Buy America push (albeit, one he and his family don’t adhere to in their own businesses).
Although US airlines are “deregulated,” in that they can set routes, fares and fees without government approval, they are still subject to a myriad of federal regulations and approvals. International route authority is still a federal purview. FAA regulations (and inspections) are another.
One can just imagine if Delta buys Airbus. Notwithstanding the fact that many (or maybe all) of the A320neos might be assembled at the Mobile plant in deep red Alabama that loves Donald Trump, Boeing has remarkably and successfully kissed up to Trump and massaged his ego to no end. Boeing CEO Dennis Muilenburg didn’t take a strong stand about Trump’s Charlottesville (WV) remarks basically endorsing white supremacists. Several CEOs on Trump’s Business Council quit in protest. Not Muilenburg.
When it comes to Boeing vs Airbus in Washington (DC), and especially the White House, Boeing has the advantage.
Those I’ve talked to in the market think that on the merits, the choice between Airbus and Boeing is a coin toss. But throw in Trump’s Buy America and the C Factor, those I’ve talked to think Boeing is more likely to get the nod than Airbus.
It all comes down to the Board of Directors. We should know the answer by the end of this week.