Is Boeing Only Half as Good as Airbus?
In October, Boeing suffered a crushing defeat in its eternal battle with EADS' Airbus. In back-to-back skirmishes, the Seattle giant lost two bidding wars to its rival.
First, formerly loyal customer VivaAerobus in Mexico gave $4 billion worth of plane orders to Airbus rather than to Boeing. Then, in an even bigger bruise to Boeing's ego (and its bank account), Japan Airlines gave Airbus a contract for $9.5 billion worth of planes. Add it up, and that's $13.5 billion worth of revenue (at list prices, which are usually heavily discounted) that should have been Boeing's for the taking -- but that got taken by Airbus instead.
Ouch is right. Now, Boeing isn't taking this lying down. Turnabout is fair play in the airplane wars, and Boeing's fighting back. Last night, we learned that Boeing has swiped one of Airbus' traditional customers. Boeing won a firm order from Air Canada -- a traditional bastion of Airbus-buying -- for a total of 61 737 MAX planes, worth $6.5 billion at list prices.
But that's still just half of the sales Boeing lost in the VivaAerobus and JAL deals. So yes -- lately, Boeing has been doing only about half as well as its rival.
Granted, Boeing still has a chance to close the gap. In addition to ordering 61 planes "firm", Air Canada also took out "options" and "rights" to buy 48 more Boeings at a later date. These follow-on orders could potentially add as much as 80% to the size of the Air Canada deal.
What's more worrisome than the sales numbers, though, is what all this infighting and customer-swiping might mean to the bottom lines at both Boeing and Airbus. After all, when an airline invests billions of dollars in buying one airplane maker's planes for its fleet, it makes a big commitment -- in configuring facilities to service one type of plane, in training its mechanics to work on these planes, and training its pilots to fly them. Switching horses midstream is not a decision an airline makes lightly. It needs a big incentive -- a big financial incentive -- to push it to make the switch.
It stands to reason that every time Airbus steals a customer from Boeing, it does so at a cost -- a cost measured in discounts to list price and weakened profit margins. Similarly, in stealing Air Canada away from Airbus, Boeing may have been forced to make significant concessions.
How big might those concessions have been? Historically, airlines making large unit purchases of aircraft have negotiated substantial discounts as a matter of course. When Ryanair made a similar-sized purchase of 70 Boeing 737s back in 2005, for example, it reportedly got the planes' list prices cut in half -- and that was with Boeing selling planes to an existing customer. (According to The New York Times, Ryanair scored another 50% off sale in its larger, 175-plane purchase earlier this year). You've got to figure that, before switching allegiances from Airbus, Air Canada bargained at least as hard with Boeing.
As it turns out, we know for a fact that Air Canada drove a hard bargain with Boeing. In order to win the Air Canada order, Boeing had to make the unusual promise to buy 20 of Air Canada's 45 Embraer190 jets off of the airline. As for the dollars-and-cents concessions Boeing was forced to make, the proof will be in the profit margins.
Take a lesson from Warren Buffett
Warren Buffett has bought scores of airplanes for Berkshire Hathaway's Netjets subsidiary, but he famously shies away from investing in airlines. Instead, he's focused on his very best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love.
The article Is Boeing Only Half as Good as Airbus? originally appeared on Fool.com.Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.