Psst! Buddy! Want to Buy an Airplane ... Cheap?
On Dec. 13, 2011, aerospace giant Boeing (BA) announced its biggest ever (at the time) firm order -- a mammoth 150-plane order for 737 MAX jetliners to discount airline Southwest (LUV). When combined with a purchase of 58 run-of-the-mill 737s, news media touted the deal as adding $19 billion to Boeing's top line, with Boeing's $100 million-apiece MAX jet providing the bulk of the winnings.
Then someone at Southwest let the cat out of the bag. It was only paying $35 million per plane -- a 65% discount to list price.
A few months before this, Russian flag carrier Aeroflot scored a similar deal. No sooner had Boeing bragged of its success in selling eight Boeing 777s to Russia at an estimated $2.2 billion, than Aeroflot let slip that the actual sales price was closer to $1.2 billion. And before this, we heard rumblings out of India about how local wheeler-dealers at Air India managed to wheedle a 43% discount out of Boeing in their deal to purchase seven of Boeing's shiny new 787 Dreamliners.
It gets a consumer wondering: How is it that Boeing's customers keep scoring such hefty discounts to sticker price? Are airplane shoppers really such good negotiators, or is something else going on?
Turns out, it's the latter. According to The Wall Street Journal, if you take the kinds of sales numbers airplane builders like Boeing and Airbus announce, and compare them to what their customers say they actually paid for the planes, some pretty big disparities appear.
Airplane Math
According to the Journal, any time a deal is announced as valued at $X "per list price," you probably have to subtract anywhere from 20% to 60% of the touted price to arrive at what an airline actually paid for its new planes. On average, discounts hover around 45%, and "savvy buyers don't pay more than half the sticker price."
It's a system that Ace Aviation Holdings (Air Canada) chairman Robert Milton describes as "wacky." But it should feel familiar to any shopper who's ever patronized a Jos. A. Bank (JOSB) "Buy one suit, get one free" sale, purchased a diamond at "below appraised value," or bought a new car and gotten "cash back" in the process.
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In other words, it's a marketing ploy. When airplane makers jack up their list prices, then happily offer deep "discounts" to show how much they appreciate a customer's business, everybody winds up happy. Airlines feel they're getting a great deal, and can report the same back to their shareholders -- with a straight face, because the publicly advertised list price proves they got a great deal. It's all there in black and white. Meanwhile, the fact that Boeing's "discounting" its price sharply doesn't seem to be hurting the company any. Even after all the so-called discounting was done, the company still booked $55 billion in revenues, and $4.4 billion in net profit.
Last week, Boeing crowed about its massively successful showing at the Farnborough Air Show in England: 373 aircraft sold (three times as many as Airbus unloaded). The sales bonanza included a 75-plane sale to airplane leasing giant Air Lease (AL), and an even bigger deal to supply United Continental (UAL) with 100 of the new 737 MAX jets and 50 more current-generation 737s.
In all, Boeing booked orders worth an estimated $35.6 billion at "list prices" last week. That these list prices are totally bogus, and that Boeing will actually collect only $18 billion or so from its English sales efforts, should not detract from the fact that $18 billion is still an awful lot of money.
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Motley Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Southwest Airlines.
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