A Look At Boeing's Most Risky Mega-Order

| About: The Boeing (BA)

Summary

Boeing will deliver up to 109 aircraft to Iran in the first round.

Deal still has to gain approval.

Dreamliner not part of the tentative agreement.

A potential order from Iran Air has been the main subject of an earlier article. In my article, "Iran Where Are You? Boeing Needs You...", I looked at a possible order composition. Earlier in June, Boeing (NYSE:BA) and Iran signed a tentative agreement, but very little information was disclosed about the size and structure of the agreement leaving investors in the dark. More and more information has become available about the order Iran placed with Boeing. In this article I will have a look at how the actual order composition stacks against the order composition and size expected by AeroAnalysis, based on earlier orders and available information.

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AeroAnalysis estimates

First of all, it is important to have a look at what AeroAnalysis expected based on the order with Airbus:

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Figure 1: Estimate made by AeroAnalysis for the order composition of Iran Air order (Source: www.AeroAnalysis.net).

AeroAnalysis estimated a total of 90 orders valued at $21.6bn. The order was expected to be a mix of narrow and widebody aircraft. The split between narrow and widebody aircraft was expected to be roughly 35-65.

I estimated 34 orders to be placed for the Boeing 737, a mix between the Next Generation 737 and the 737MAX.

For the wide body aircraft, I expected up to 19 Boeing 787 to be part of the order and up to 37 Boeing 777s. The 777s would be a mix of the Boeing 777 Classic and the Boeing 777X. Although Iran seemed to be charmed by the Boeing 747-8I, I did not include this in the order composition.

Boeing 737

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Figure 2: Estimate versus the ordered Boeing 737s (Source: AeroAnalysis)

New details of the tentative agreement between Boeing and Iran show that Iran indeed did order the Boeing 737. The division between Boeing 737NG and 737MAX, however, is vastly different from what I expected. Additionally, the number of ordered units is different as well. A total of 46 Boeing 737s are likely part of the order, whereas I expected 34 orders. Secondly, Iran seems to have a preference for the MAX instead of the cheaper 737NG. The catalog value of the. After discount, the value is closer to $2.4bn.

Additionally, Boeing will help Iran with the lease of 29 Boeing 737NG aircraft. So the total order for the Boeing 737 stands at 75, 46 will be bought and 29 will be leased from Boeing.

Boeing 787

While I expected Iran to order up to 19 Dreamliners, it seems the Boeing 787 is not part of the deal. The 19 orders I expected would have had a catalog value of $5bn and $2.6bn after discounts. Iran seemed to be charmed by the Boeing 787, so to me it was a surprise that the Dreamliner was not part of the deal. On the other hand, this should not have come as a surprise at all since it will take years for delivery slots to become available. Iran's demand for new airframes is urgent, ruling out the Boeing 787.

Boeing 777

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Figure 3: Estimate versus the ordered Boeing 777s (Source: AeroAnalysis)

The Boeing 777 does seem to be part of the order and as expected Iran will be an order for the current 777 model as well as the Boeing 777X, which will enter service in 2020.

Orders for the Boeing 777-300ER were lower than I estimated, but still will help Boeing in closing the production gap. The order for 15 Boeing 777-9 aircraft does meet my expectation of at least 14 aircraft. The catalog value of the order for 30 Boeing 777 airframes is $11.1bn.

Boeing 747

Whereas I expected Iran to go for only one superjumbo for now, namely the Airbus (OTCPK:EADSF) A380, it has chosen to order 4 Boeing 747-8Is. This, of course, gives the Boeing 747 program some much needed orders. On the other hand, I do question whether Iran Air will be able to rapidly set up a network in which the Boeing 747 and Airbus A380 can be operated with profit.

Conclusion

Iran ordered a total of 80 aircraft with a catalog value of $17.6bn. Over 40% of the order was for a wide body aircraft, beating my expectations of a 65-35 split between narrow and wide body aircraft.

My estimate for the order composition used a composition comparable to that of the order Iran placed with Airbus.

The main differences between my estimate and the actual expected order composition are the following:

  • The actual order will be for 80 units in a sales agreement and 29 aircraft to be leased, totaling 109 aircraft. This is above my expectation of 90 aircraft and 9 aircraft shy of the number of aircraft Iran ordered with Airbus.
  • Iran has a preference for Boeing's new narrow body product. This feeds the thought that the Airbus A320ceo that Iran ordered were acquired at end-of-production prices.
  • The Boeing 787 was not part of the deal, while it was initially pitched to Iran. The absence of early delivery slots likely is the reason for this absence.
  • The total value of the order is $17.6bn, whereas I expected it to be around $22bn. This $4.4bn difference is caused by the Dreamliner not being part of the deal.

All with all, Boeing and Iran will be happy with the deal. It has to be noted that the deal is far from final and needs to gain approval . Some Congressmen already are trying to block the deal. This politically motivated objection is a threat to the deal.

If the order were to fall through, it would not mean that the Iranian market will be a monopoly to Airbus. The Airbus aircraft do use parts produced by US companies as well, which means that also that deal would likely be blocked.

The bigger threat to Iran might be taking delivery of over 200 aircraft in the coming years. The infrastructure, airline network and crew training all have to be brought up to par with nowadays standards. Additionally, it yet has to be seen whether the airline will be able to operate a fleet of 200 aircraft in a sensible way.

The order placed by Iran for Boeing and Airbus is a welcome one, but the size of the order is geared towards Iran becoming one of the financial centers of the world.

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Disclosure: I am/we are long BA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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