Boeing's Battle For The Skies Heats Up With Big New Orders

Mar.20.13 | About: The Boeing (BA)

Boeing (NYSE:BA) gained an order commitment on Tuesday for 175 narrow body Next Generation (NYSEMKT:NG) 737-800 airplanes from Irish low-cost carrier Ryanair. This deal upon approval from Ryanair's shareholders will more than double the number of narrow body airplane orders that Boeing has received so far in 2013. At list prices this deal is valued at $15.6 billion.

Interestingly, this order came on the same day that Airbus bagged a mega order worth $24 billion for 234 narrow body airplanes from Indonesia based low-cost carrier Lion Air. Lion Air was until now seen as a reliable Boeing customer as it operates an all Boeing fleet and had last year placed a large order for 201 narrow body Boeing 737MAX airplanes, but its shift to Airbus reveals that severe price competition between these two leading aircraft manufacturers continues to persist.

We currently have a stock price estimate of $82 for Boeing, approximately 5% below its current market price.

Market Share Gains Force Boeing And Airbus To Resort To Aggressive Pricing

Airlines typically avoid changing aircraft manufacturers for their airplane fleets as operation of a single aircraft type brings cost synergies in training and inventory management. However, Airbus' recent order from Lion Air which operates an all Boeing airplane fleet, and Boeing's order last year from SilkAir which operates an all Airbus fleet, point to the presence of steep price discounting offered by both Boeing and Airbus in order to gain market share.

Boeing And Airbus Continue To Fight For Market Share With These New Orders

These orders from Ryanair and Lion Air belong to the narrow body (single aisle) segment of the global commercial aviation industry. This segment sees the highest production and sales volume of any other commercial aviation segment, and competition here between Boeing and Airbus is intense. In this segment, Boeing's 737 series competes with Airbus' A320 family of aircraft.

Last week Boeing announced that it rolled out the first 737 at an increased production rate of 38 airplanes per month with plans to raise this rate further to 42 airplanes per month in the first half of 2014. In comparison, Airbus already produces A320s at a rate of 42 airplanes per month and is currently contemplating raising this even higher. Both of these airplanes also have huge backlogs. While Boeing's 737, excluding the under development 737MAX, had 1,951 unfilled orders at the end of February 2013, Airbus' A320, excluding the under development A320neo, had 3,689 unfilled orders through February 201s.

Overall, so far in 2013, total commercial airplane orders for Boeing stand at 366 (including the order from Ryanair) and those for Airbus stand at 396 (including the order from Lion Air). This is in contrast to 2012 when Boeing led Airbus from the start and ended the year with 1,203 orders compared to Airbus' 833.

Disclosure: No positions.