Airbus Did What Boeing Couldn't

| About: The Boeing (BA)

Summary

Order mix has become more realistic.

Financing is still a hurdle for Boeing.

Congress and incoming president likely to give Boeing and Iran a tough time.

The orders from Iran with Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) are widely eyeballed, not only due to their size but also due to the controversy of the order. Additionally, the final orders do look quite a bit different from what was tentatively agreed on, justifying extended coverage.

Airbus was the first to outline the tentative agreement it reached with Iran, but it was Boeing that was first to obtain a license to sell aircraft to Iran. Nevertheless, Airbus followed shortly after and finalized the order by year end, while it seems that Boeing is still working on the details with Iran. Airbus has finalized the agreement in late 2016 and even delivered its first aircraft to Iran.

In this article, I want to look at the final order composition for the Airbus deal and dedicate a few paragraphs to the risk that circles above the orders.

Tentative agreement versus final agreement

Table 1 nicely showcases the differences between the tentative agreement and the final agreement. One of the main conclusions you can draw is that the orders became more forward-looking by adding more of the neo aircraft for the Airbus A320 family as well as for the Airbus A330 family. The Airbus A350 order remained the same as in the tentative agreement.

To me it seems that the Airbus A330-900neo is the better fit for IranAir. The aircraft has appreciable capacity (not too big, not too small), fuel efficiency and price tag. The A320neo, A330neo and Airbus A350-1000 are likely to enter service when fuel prices head higher again. For the time being Iran Air has ordered itself some ceo (Current Engine Option) aircraft to renew an expand its fleet. The current engine option aircraft are cheaper and likely have some early delivery slots available, something that Iran most definitely is looking for.

Iran had been eyeballing a certain sales price for the entire deal and the Airbus A380 did not seem to fit in that budget and was subsequently removed from the deal. To me this did not come as a surprise. The moment Iran tentatively agreed on buying jumbos from Boeing as well as Airbus and ordering the Boeing 777X, I questioned the feasibility of such construction:

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.

and

… the size of the order is geared towards Iran becoming one of the financial centers of the world.

Risks

With the Airbus A380 likely being a bit too expensive for Airbus and not a best fit for IranAir, I think it is important to have a look at the risks.

One of the major risks or worries is the financing of the aircraft. One comment I often read is that 'Obama will send a plane with money to pay for the aircraft', that will be over soon as Donald Trump becomes the 45th President of the United States and has full support in Congress.

One of the reasons the deal with Boeing has not yet been finalized is because there does not seem to be an agreement on the financing of the deal with little tools from Boeing's side to do so. Congress has barred Boeing from providing risk-free financing via the ExIm Bank. The embargo for the financial sector still holds, which means that US banks cannot participate in the financing either. For Airbus this also played a role, but banks were a bit more willing to look into participation in the financing effort. Eventually the aircraft will be supplied via lease construction including a lessor, likely the biggest lessor in the Middle East.

For Boeing, such a construction is also possible, but the entire payment trajectory will likely have to be done in a currency other than the US dollar.

Another risk is that the deal will be completely off as Trump is a not a supporter of the nuclear deal. Although I think there is a small chance that Trump will be blocking the deal as soon as he gets a chance, Congress is putting a lot of pressure on the certainty of the deal.

Another risk is capacity growth. The Iranian market is in dire need for new aircraft, but buying 200 aircraft at once is a lot. The aircraft will be delivered over a 10-year timeframe. To be able to successfully absorb these aircraft, the Iranian economy needs to grow.

This can only happen when oil prices head higher again and further easing of sanctions that are still in place.

Conclusion

The deal Airbus reached with Iran is different from what was tentatively announced, but I only applaud it since it is a more realistic aircraft mix.

For Boeing things are more difficult, especially when it comes to financing and it remains to be seen when the company can add the Iran orders to its tally and under what conditions and what Congressmen think of it.

In the end, there is time for Boeing to work on the financing as the first delivery is not planned until 2018. However, with the current market conditions sparking deferrals Boeing would not want to lose Iran as a customer. Boeing will survive with or without Iran, but at the moment they need business with Iran a bit more than anybody would like to admit.

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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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