Ryanair Decides Not to Buy 200 Boeing Planes

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Boeing (BA) is seeing plenty of turbulence these days. No sooner does it get some good news than it gets smacked with bad. The good news was that on Tuesday, Boeing managed to get a partially successful test flight of its 787 off the ground. The bad news Friday, according to Bloomberg News, is that Ireland's Ryanair (RYAAY) has ended discussions regarding an order for 200 Boeing 737s valued at $1.4 billion (representing 0.55% of Boeing's $254 billion backlog) for delivery between 2013 and 2016.The cancellation of discussions with Boeing is consistent with this history of expansion and retreat. I teach a case on Ryanair for an undergraduate class about its decision in the 1990s to fly a half-price route between Dublin and London's Heathrow. The punch line of this story is that Ryanair became so successful with this route that it expanded rapidly and a few years later found itself short on cash and needing to retrench.

However, the good news for Boeing is that the end of negotiations with Boeing on these 200 737s does not currently change its plans to buy 112 of them for delivery between 2010 and 2013. Ryanair plans to distribute the $1.4 billion in cash freed up by the decision not to buy those planes to pay dividends to shareholders.

This could signal an end to Ryanair's traditional growth strategy. That's because the relatively low barriers to entry into the low cost carrier market and Ryanair's success there has attracted new competitors like EasyJet. This new competition makes it harder for Ryanair to achieve the kind of rapid growth and capacity expansion it enjoyed in the past.

This is likely to be good news for Ryanair's shareholders in the short-term and bad news for Boeing's. On the other hand, if over the next few years Ryanair decides it is willing to buy these 200 aircraft at lower prices, Boeing could benefit.

Peter Cohan has no financial interest in the securities mentioned.

Meet Peter Cohan at The World Money Show Orlando, Feb. 3-6, 2010, at The Gaylord Palms Resort.
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