Ryanair-Boeing, the war for the maxi discount behind the order of 300 planes – WWN

To sign the maxi-order for 300 aircraft Ryanair CEO Michael O’Leary has tried to wrest a total discount of 70-72% from the US aircraft manufacturer Boeing and CFM International from the $40.6 billion list value. A record. But a series of circumstances – favorable to Boeing, a little less to the European low cost – forced the master of savings to accept a cut estimated at between 65 and 67%. Which is still one of the highest rebates ever granted. how much rebuilds the Courier on the basis of information provided by five company sources familiar with the negotiations which, given their nature, remain confidential. Boeing declined to comment for this article. Ryanair, requested several times, did not respond. While a spokesman for CFM International, a joint venture of GE Aerospace and Safran, confirms the request for 300 engines for 150 aircraft and other spares, plus a further 300 optioned, but – he adds – we do not disclose the terms of the commercial agreements with our customers.

The voices of the agreement

Discounts — usually over 50% — are standard in the aviation industry, especially when there is a significant order. When a company commissions aircraft, it also decides which type of engines to equip them with, asking for another reduction. In the case of the 737 Max 10, the most requested engine at the moment is the CFM International Leap-1B. In the latest Boeing price list, the 737 Max 10 is listed for 135 million dollars which also includes the two engines. Each Leap-1B has a list price of $14.5 million, bringing the cost of the fuselage alone (made by Boeing) to $106 million. Making an exact calculation of the discount applied is not easy, several insiders point out. The total value of the order, in fact, takes into account various factors that go beyond the simple jet: in the agreement, for example, other items can be included, such as a free package of hours for training pilots in simulators, the maintenance for the years following entry into service, painting of the livery with the brand of the company, payment by installments.

The clutches

In recent months, the sources explain, the CEO of Ryanair O’Leary made it clear to Boeing and CFM International that he would like a 70-72% discount to finalize the mixed maxi-order of 737 Max 8200 (with 197 seats) and 737 Max 10 (228 seats). The negotiations – the reconstruction – stalled at that point. O’Leary, not at all happy, began to openly criticize Boeing and its delivery delays, also caused by a global supply chain suffering from a lack of parts and manpower along the supply chain. I think if we ever find an agreement with Boeing on new planes it will be between the end of 2023 and the beginning of 2024, O’Leary told the last March Courier during a chat in Brussels.

The announcement

Less than two months later, right in Washington, a smiling O’Leary next to Boeing CEO Dave Calhoun announced the purchase of 150 737 Max 10 jets and the option for another 150 for a total list value of more than 40 billion dollars. The aircraft, it should be remembered, still needs to be certified for commercial activities by the FAA (in the USA) and by EASA (in Europe). I was told to tell you that they priced us competitively, but frankly I don’t think they were, joked O’Leary. I expected to get the same discount as last time. The sources explain that in the end the reduction applied was still significant, around 65-67%. In the presentation of data for the 2023 financial year, the low cost speaks of a competitive discount.

The market

Helping Boeing, insiders point out, was an almost unprecedented recovery in orders. Air India on February 14 requested 190 Max aircraft (without specifying the model), in July 2022 Delta Air Lines booked 100 (Max 10) which add to United’s 250 a decade ago. With a thousand 737 Max 10s yet to be realized, O’Leary’s fear at that point was of sitting out a few years of fleet renewal with larger aircraft. In fact, with each additional month of negotiations, he would have moved the date of receipt of the new planes to 2028-2029 for the low cost. Too late at a time when — as the CEO has made clear to Courier in a press conference — our other competitors in Europe now fly with more capacious jets, such as the Airbus A321, than the ones we currently use. Wizz Air, for example, is increasingly using A321neos with 230 seats, while easyJet has installed 235 on the same model jets. It becomes difficult to compete with them if we provide 189 or 197 seat aircraft.

The new aircraft

In the last few days of the negotiations, those familiar with the exchanges explain, Boeing offered a discount of around 60-62%, without finding favor with Ryanair. The solution, with the final reduction of 65-67% on the list price, was found after the low cost company added another 100 aircraft to the order, as O’Leary himself revealed to reporters. The manager – known for obtaining favorable prices thanks to his commercial and industrial weight – in the March chat with the Courier he did not want to provide numbers on the (real) price per aircraft. But he has explained several times that Boeing should have recognized a considerable discount. Personally I prefer the Boeing 737 Max 8 200 because we already operate them, he explained. The 737 Max 10s are bigger, they have 228 seats, they need an extra flight attendant, so they introduce extra costs for me, and if we have to fill all those extra seats, I have to lower the fare. This is why what we say to Boeing: we take the 737 Max 10 – if you want -, but we need a discount on those additional seats precisely because I have to reduce profit margins to sell them.

Profit margins

O’Leary’s reasoning is this: if to fill an airplane with 189 seats (the Boeing 737-800) an average fare of, for example, 50 euros is sufficient, obtaining 9,450 euros, to sell all 197 seats of the Boeing 737 Max 8 200 Ryanair needs to reduce that average fare to €48 (which generates the same overall revenue). But if he has to get the Boeing 737 Max 10s with 228 seats to take off full, the average fare must be reduced to 41.5 euros because he knows that the market must be stimulated with more attractive fares. In all of this, as O’Leary recalled, with the 737 Max 10 we need to add a flight attendant, therefore an extra salary, therefore higher operating costs.

The analysts

According to the specialized company Iba, the 300 specimens have a value of 17.3 billion dollars. This means that Iba already recognizes a basic discount of 43%. Then it is up to the carriers to aim for a greater reduction. Several companies – such as Ryanair or the Indigo Partners fund that manages Wizz Air – manage to obtain discounts of at least 60% because they place significant orders. According to BofA Global Research analysts, with the 300 new Boeings, Ryanair’s fleet will grow to 800 aircraft from the current 537. This will allow the low cost airline to move from a market share in Europe of around 22% (it was 9% in 2007) to 30% expected in a few years. And the extra flight attendant required by the 737 Max 10 won’t be a problem for unit costs given the high number of seats on board. After all, net of fuel costs, Ryanair spends 31 euros per passenger carried, compared to an average basic fare of 41 euros.

Subscribe to the newsletter of The Economy

Whatever it Takes by Federico Fubini

The challenges for the economy and markets in an unstable world

Europe Matters by Francesca Basso and Viviana Mazza

Europe, the United States and Italy that count, with innovations and important decisions, but also small important stories

One More Thing by Massimo Sideri

From the world of science and technological innovation the news that changes our lives (more than we think)

And don’t forget the newsletters
The Economy Opinions And The Economy 6 pm