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Ryanair's O'Leary not willing to commit to 737 MAX yet

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Aircraft order negotiations between the major manufacturers and airlines always carry an element of intrigue, but there’s a particularly high wish-I-were-a-fly-on-the-wall feeling regarding Boeing’s talks with Ryanair.

Boeing is no doubt celebrating Tuesday’s massive order from the Irish low-cost carrier for 175 737-800s (still needing to be finalized by the carrier’s shareholders), but Ryanair CEO Michael O’Leary held off on giving Boeing a complete victory for now. There was no commitment—even of the options variety—for the 737 MAX, only a statement from Ryanair that it “continues to evaluate the benefits” of the aircraft set to enter service in 2017.

Does that mean O’Leary wants more from Boeing on the re-engined narrowbody? Or simply a lower buying price than Boeing is currently offering?

The 737-800 order is nevertheless a boost for Boeing, particularly coming a day after Indonesia’s Lion Air ordered 234 Airbus A320neo family aircraft and a few days after Turkish Airlines inked a deal for 82 A320 family aircraft, a mix of the re-engined neo and classic versions.

Boeing Commercial Airplanes president and CEO Ray Conner, speaking to a JP Morgan conference earlier this month, said the transition from building 737NGs to MAXs will be smooth, with both likely to be built simultaneously for a few years. “We feel very good about our bridge from the NG to the MAX,” he said. The Ryanair order will help make that bridge sturdy, ensuring a signature customer for which Boeing will be building 737NGs through at least 2018.

The three big narrobody orders placed in recent days buttress claims by Airbus and Boeing that demand in that segment is robust, global economic concerns notwithstanding. “We have more [narrowbody] demand in some years than our production can handle,” Conner said.

No doubt O’Leary drove a hard bargain in negotiations over the 737-800s. The list price value of the order is $15.6 billion, but it is unlikely Ryanair is paying anything close to that.

O’Leary has some leverage. Some customers are more important than others; when it comes to the 737 line, Southwest Airlines and Ryanair are seen as critical for Boeing. As Conner said in a statement announcing the Ryanair order, the Dublin-based LCC is “of the utmost importance” to Boeing.

Adding more pressure for Boeing and Ryanair to reach a deal now is this week’s visit to the US by Irish Prime Minister Enda Kenny, who is meeting with President Barack Obama at the White House Tuesday. Kenny plans to make a stop later this week in Seattle, where he will be eager to highlight Ryanair’s big order.

Discuss this Blog Entry 1

on Mar 20, 2013

MOL can be diplomatic when he wants to. But he is a shrewd operator. Deep down, he knows that, in the airliner segment of 75- to 160-seater single-aisle airliners, airframe technology is far behind engine technology. That does not, in itself, bother him, because he knows how to make good deals, and draw the quintessence out of these obsolescent air-frames.

This is why he drives a hard bargain, because a low acquisition price is his BEST FRIEND as a basis of calculations of his over-all cost-performance, and the various ratios such as ROI etc. MOL knows how to think “Cash-Flow” & “Profit / Net Income”. RYANAIR’s financial partners will admire that.

But the “purist approach”, which MOL is capable of having, aligns his “purist thinking” on that of RR. We are now condemned to having till 2027-2030, for the B737-NG & A320-family replacement markets, a slew of upgraded but really sub-optimal airframes (in relation to modern technology : materials, process, production system & concomitant aerodynamics-technology). “The cosmetic treatment has been applied to the shoe-box”!

These revamped, re-engined tin-tubes cannot use the full potential of the new-generation engines, and these new-generation engines cannot help the airframes deliver what they do not have to give !

The real problem is that, even if the Airbus CEO-versions and the Boeing NG’s keep residual values reasonably buoyant till the NEO’s & MAX approach their respective EIS dates, there will finally be steep falls in those “residuals”, be they inexorable & progressive, or sudden & sharp.
Worse, said steep falls in these will DRAW DOWN the pricing-acceptability levels of NEO & MAX aircraft.

MOL is playing on this, factoring in his assumptions now. One might say that he is “playing hard-ball”, … or “getting his retaliation in first” ! That is what MOL is doing : pitching what he is prepared to pay at the bottom levels (ok ; we do not know the details ; nor do we have to ; because we know already that that is precisely what MOL & RYANAIR do ; it is no secret ).

Given the latest news, mentioned in my response to your fair Blog input, Aaron, one recalls some of MOL’s remarks to both Boeing & Airbus, when, together in timing, but not necessarily "in cahoots", both air-framers snubbed MOL's pitch for an order of at least 200, & maybe 300 or so aircraft.

Now Boeing – not RYANAIR – are coming up to the plate, not to eat, but to solicit RYANAIR’s orders.

And Airbus do not want to go there! After the spate of orders for their single-aisle Airbus family, in the last two-and-a-quarter years, now including the massive Lion Air order, just confirmed, Airbus have no intention of bidding in a low-balling contest. That is a no-brainer !

Boeing are reacting to MOL’s judicious remarks, when he decided to pay out those billions of Euros in a super-dividend, thereby reducing the resources available for investment in new aircraft.
MOL said , inter alia, that, given the mess that this NEO & MAX operation was going to create in the market’s residual values, and even in the new-build prices for Airbus CEO’s, he would not pay a cent more than the CEO & NG prices, duly discounted, for any NEO or MAX, if he ever decided to order any.

He made it clear that the additional weight of NEO & MAX (heavier engines and airframe, this latter requiring additional reinforcement and aerodynamic “tweak adjuncts”) was prejudicial to his cost-base structure, owing to the inevitable landing-fee increases.

At root, RYANAIR’s business is not about ferrying passengers & luggage ; it is about LANDING & TAKING off in the process of transporting passengers on SHORT FLIGHT SEGMENTS. Accordingly, NEO & MAX do not really work for MOL & / or RYANAIR !

RYANAIR’s success is, probably, based more on “Cash NOT out”, than on “Cash IN”, … though they are not mutually exclusive in MOL's or the corporate vision !

In MOL / RYANAIR’s fleet-renewal specifications is, doubtless, a component relative to clever maintenance avoidance, by “D-check avoidance”, NOT illicitly -- no, no ! – but by perfectly judicious “timing” of fleet withdrawals, or astute negotiation in fleet renewal, to have the “other guy” (Boeing) as part of the deal, look after and pick up (most of ) the tab for the heavy cost of this routine.

Indeed, MOL knows how to be flexible & reasonable, … with a strong leaning toward HIS terms. That is all part of the game. Nothing wrong with that.

Now, Boeing has allowed MOL / RYANAIR to ensure the first step, by consenting to a heavily discounted acquisition price level on these 175 X NG B737-800.

RYANAIR is willing to entertain this sort of idea in relation to pricing levels of the B737-MAX, even if it is not RYANAIR’s strategy to-day to go looking in priority for routes or flight-segments with flight-times of 3 to 4 hours !

But MOL / RYANAIR would not be averse to having the potential to exploit such routes, thanks to a fleet adapted thereto, and acquired at rock-bottom prices ! Then they may be willing to go scouting around for a few such route opportunities.

Boeing know what they have to do !
Watch this space !

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