In October 2016, Qatar Airways surprised with an order for up to 100 aircraft. The deal included 40 wide body jets, which might be somewhat surprising given the current low fuel prices and overcapacity that make it unappealing to buy wide body jets. On the other hand, the deal was anticipated for quite some months and is likely the result of the then-White House administration giving a green light for a fighter jet sale to Qatar. Focus in this article lies on the Boeing (BA) 737 MAX that was part of the 100-aircraft deal.
Boeing 737 Letter of Intent
Qatar Airways has been fed up with Airbus (OTCPK:EADSF) since the jet maker failed to deliver the Airbus A350 in time to the airline and when the Airbus A320neo also coped with teething issues the airline started canceling the aircraft on a one-by-one basis. This probably is a silly thing to do if you have tens of aircraft on order for the type, but it pretty much showed how unhappy the airline was with the situation.
While the issues were not specific to Qatar Airways, the Gulf carrier has been the only airline that canceled its orders and said to be seriously considering ordering the Boeing 737 MAX instead. It was widely assumed that this was only rhetoric to push back A320neo deliveries and that Qatar Airways had no real intention to acquire the Boeing 737 MAX. In June 2016, I, however, marked the one-by-one cancellations as an opportunity for Boeing and months later Qatar Airways indeed expressed its intention to acquire 60 Boeing 737 MAX 8 aircraft.
No Boeing 737 MAX for Qatar Airways
The second question that followed directly after the order intent was whether Qatar Airways would really operate the Boeing 737 MAX, since they had not canceled the Airbus A320neo family orders and in its history the company only operated 1 Boeing 737. With 49 Airbus A320ceo family aircraft in service there is no doubt that Qatar Airways prefers the Airbus narrow body product over what Boeing has to offer. With this in mind, the Qatar Airways intention to order the 737 MAX makes little to no sense other than that it wants to teach Airbus a lesson.
In an interview, Al Baker, CEO of Qatar Airways, confirmed that his airline would not operate the Boeing 737 MAX: "We won’t operate the A320 with the 737. The 737 is to cater for investment in other airlines."
If there was any doubt, Al Baker took it away in the interview. Qatar Airlines currently has a stake of 20% in the International Airlines Group, which consists of British Airways, Iberia and >95% stakes in low-cost carrier Vueling and Aer Lingus. All of these airlines are loyal A320 operators, so it is unlikely that Qatar will place aircraft with these carriers.
In December 2016, Qatar Airways bought a 10% stake in LATAM (LFL). This airline has a preference for the Airbus A320 and has the Airbus A320neo on order. Meridiana, in which Qatar has a 49% stake, is the sole operator that Qatar Airways has invested in and operates the Boeing 737.
The airline has an active fleet of 18 aircraft, 13 of which are narrow body aircraft. The six McDonnell Douglas aircraft that the airline operates are nearing their end of economic life and will be phased out soon. Meridiana is small airline that has been coping with financial problems for some years. Part of the airline’s problems are rooted in the high head count and the relatively old fleet that makes operations expensive. Combining this with pressure from low-cost carriers such as Ryanair (RYAAY), the airline is unable to keep all its aircraft in service but also cannot acquire new jets and is forced to store aircraft to reduce costs.
Boeing 737 MAX for Meridiana
Part of Qatar’s plan for the airline includes a reduction in head count and removing the cost overhang of the old fleet, which will be done by adding the fuel-efficient Boeing 737 MAX to the fleet. I think that out of the 60 aircraft that the Qatari carrier wants to order at least 15 could be placed with Meridiana for renewing the active fleet, and another 15 to compensate for the aircraft that have left the fleet over the past couple of years.
No exact fleet plan for the Meridiana fleet is known, but Qatar Airways wants to grow the fleet of the Italian carrier to 50 aircraft. These aircraft can be directly sourced from the 60 aircraft that the airline plans to order. Thirty units will account for renewing and reinstating the Meridiana fleet, while 20 units will be used to grow the fleet and create a bigger network in Europe.
So the letter of intent that Qatar Airways signed with Boeing for the purchase of 60 Boeing 737 MAX does have a purpose and is not only meant to annoy Airbus. If a restructuring for Meridiana is successful, the airline could potentially absorb all 60 aircraft. Additionally, Qatar Airways has interest in acquiring a stake in Royal Air Maroc so if Meridiana is not able to absorb the entire quantity, part of the MAX fleet could be used for Royal Air Maroc if Qatar Airways proceeds to acquire a stake in the airline.
The fact that Qatar Airways intends not to use the Boeing 737 MAX for its own fleet does not mean that the airline will not firm up its order intention for the Boeing 737 MAX. The problems with the Airbus A320neo, although relatively minor but a big issue to Al Baker, has opened doors for Boeing to renew the fleet of Meridiana and potentially Royal Air Maroc if the airlines reach an agreement. If Qatar Airways would not have been dissatisfied with the Airbus A320neo, it is likely that the Airbus narrow body product would have been selected to drive the fleet renewal of airlines that Qatar Airways has invested in.
So, in the end, Boeing is not losing here.
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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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