Boeing’s price to keep from losing American aircraft order to Airbus

— Boeing Co. opted to put a new engine on its 737 and put on its game face to keep from losing a big customer, American Airlines. In holding onto at least part of airline’s order, though, Boeing had to give significantly on price.

 

Boeing will build 200 of the 460-planes that Fort Worth, Texas-based American is buying over the next decade, described as the biggest single aircraft purchase in history, valued at $40 billion at list price.

 

Boeing declined to comment on the price paid for the aircraft.

 

Airbus already had piled up more than 600 orders for its A-320 with a new engine, nicknamed the Neo. But none of Boeing’s big customers had placed an order.

 

Though a long-time exclusive Boeing customer, American had signaled it would become the first to switch to the A-320. In fact, the AMR Corp. subsidiary reportedly was ready to buy all Airbus planes to replace its aging MD-80s if Boeing didn’t come up with an answer to the Neo and discounts being offered by Airbus.

 

Uncertain it could produce a new aircraft as quickly as American wanted, Boeing opted to put a new engine on the 737 and aggressively match Airbus’s bid.

 

JP Morgan analyst Joe Nadol called the move “a diving save.” Boeing’s stock rose 2.5% to $72.27 on Wednesday, though still down 5% from July 7. But in opting to go toe-to-toe with rival Airbus, which went all out to score a big A-320 Neo sale with one of the major U.S. airlines, Boeing added to the already intense price pressure in the industry.

Atlanta-based Delta Air Lines Inc., which is expected to order more than 100 aircraft, will be looking for terms at least as good. And so will Chicago-based United Airlines, when it decides to replace its aging fleet of so-called narrow-body planes that are used to do the majority of domestic flying. Ditto for Dallas-based Southwest Airlines Co., the largest Boeing-only customer, when it places its next order.

 

The decision to meet what were believed to be extremely deep discounts by Airbus was the subject of intense debate within Boeing, according to a source familiar with the discussion. Analysts argue that Boeing couldn’t afford to lose the business to American, which would have paved the way for United, Delta and perhaps even Southwest, to consider the Neo.

 

With fuel prices hovering near $100 a barrel, airlines are under pressure to find more efficient planes now. The Neo promises a 15% improvement in fuel efficiency and will be available in 2016. A new aircraft from Boeing wouldn’t likely be available until at least the end of the decade.

 

“The alternative of losing American altogether and spending even longer being shut out of the next-generation, single-aisle market would have been far worse,” says Richard Aboulaffia, vice-president at Teal Group Corp., an aerospace-consulting firm in Fairfax, Va.

 

Mr. Nadol says Boeing’s pricing would have eroded even further if it hadn’t come up with an answer to the Neo. An upgraded 737 will carry higher prices since it will be more fuel-efficient.

 

“Boeing would have been forced to lower its 737 pricing fairly significantly to remain competitive with the Neo, and the ‘re-engining’ will help it stave off that outcome,” Mr. Nadol said in a note to clients Wednesday.

 

Alex Hamilton, an industry analyst in New York at Early Bird Capital, said Boeing’s pricing power might benefit by splitting the order with Airbus because aircraft makers tend to give rock-bottom prices to buyers who use their planes exclusively.

 

“They won’t have to do that anymore with American,” Mr. Hamilton says. “And if Airbus won the whole thing, Airbus would have had greater leverage with Delta and the others to buy Neos. It puts them in a good position to keep fighting the fight with Airbus. It’s a good thing.”

 

But in the meantime, Boeing and Airbus continue the industry’s long tradition of bloodying each other, just the way Boeing and McDonnell-Douglas did before Boeing bought its rival.

 

“It’s just the nature of the beast,” says Mr. Aboulaffia. “Anyone who isn’t prepared to offer aggressive bids shouldn’t be in the business.”

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