Boeing 737 MAX: Turning A Crisis Into A Win

Summary

• Despite crisis, some airlines could be interested in ordering the Boeing 737 MAX at low prices.
• Combination of low demand and Boeing 737 MAX crisis could aid Boeing winning orders.
• Regulators seem to be aligned, and the market won't remain depressed, so airlines could be getting a long-life asset at crisis prices.
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Boeing (NYSE:BA) has been progressing on the recertification timeline for the Boeing 737 MAX. We are still quite a few steps away from recertification, but the main positives are that various regulators have performed evaluation flights, and they are much more aligned in their assessment, meaning that you could say there is a consensus, and also, Boeing has been more cooperative in taking some of the obvious steps needed to get the Boeing 737 MAX back in the air.

Source: Aviation Pros

On the 30^th of September, FAA administrator Steve Dickson piloted the aircraft, which can be seen as a sign of confidence in the work Boeing and the FAA have performed. It doesn’t clear the Boeing 737 MAX for flight, and Dickson does have some suggestions to Boeing before the aircraft goes through the final review.

However, things are looking much better, and barring any new issues, I believe the Boeing 737 MAX will indeed be back soon in a way that is safe for the flying public and crews. The big question at this stage is “who will buy this aircraft?”. In this analysis, we have a look at some potential customers.

Why buy a MAX now?

The header of this section is a question that should first be answered before we look which airlines might be on the shortlist for buying the Boeing 737 MAX. So, currently, demand for air travel is down the drain or in other words, “there is no air travel demand-driven incentive to purchase new aircraft”, and I believe that is where the opportunity arises. There is a low demand environment, and Boeing has over 400 Boeing 737 MAX jets sitting in storage, some of which do not have a customer. So, there is an imbalance between supply and demand that exerts a big pricing pressure on aircraft, and that pressure is even bigger for the Boeing 737 MAX due to its bad reputation.

What can be added to that is that Boeing will likely seek support from airlines convincing the flying public the MAX is safe. Going on a tour with the jet will likely not help the jet maker much in restoring the jet’s reputation because Boeing as a brand has a reputation problem at this time. So, having a big airline customer commit to the Boeing 737 MAX would be most helpful as it would signal that the company believes there is a place for the aircraft and that it is safe enough to attach its name to it. So, Boeing likely will also be looking to persuade a big airline name to buy the Boeing 737 MAX, and that will also come with customer discounts attached. What shouldn’t be forgotten is that aircraft are long-life assets, and while the reputation of the MAX is bad, and the demand profile is weak, airlines can be persuaded in buying the Boeing 737 MAX at the right price because demand is not going to remain low, and Boeing’s reputation, as much as we might strongly believe otherwise, will recover. What airlines could be left with is a safe long-life asset that will drive value to the airline at a discounted price. The big question then becomes “Which airlines could be interested in striking a deal?”.

Ryanair

Source: Boeing

One of the first airlines that comes to mind for a MAX order is Ryanair (RYAAY). Ryanair has been a stronghold for Boeing, and the company is the biggest customer for the type in Europe, and its importance was once again emphasized as Norwegian (OTCPK:NWARF) sent a notice of order termination to Boeing earlier this year.

Due to the acquisition of Lauda, Ryanair no longer is an all-Boeing operator, and there seemed to be chances for Airbus (OTCPK:EADSF) to make use of this and leverage the Boeing 737 MAX crisis, but Airbus did not initiate talks with Ryanair as they desired, and that shouldn’t come as a surprise. Eighteen years ago, Airbus was on the verge of signing a deal with Ryanair, and the Irish low-cost carrier dodged the deal last minute. It became apparent the deal with Airbus was only announced to gain leverage in negotiations with Boeing. When Airbus found out, the company decided not to pitch its aircraft to Ryanair any longer.

So, Ryanair is one of the airlines that seems to be stuck with Boeing. The airline has a total of 135 Boeing 737 MAX aircraft on order. In fact, Boeing actually has developed a high capacity variant of the Boeing 737 MAX 8, the MAX 200, to suit the needs of Ryanair. In total, the Ryanair Group has a fleet of 467 aircraft, including one aircraft for training purposes. So, pure from a replacement point of view, Ryanair has over 300 aircraft to order to replace its Boeing 737-800 and Airbus A320 fleet. Assuming that Ryanair will order these jets in two tranches, the companies could be in negotiations for around 165 aircraft, and the carrier is no longer just looking at the MAX 200 but also the Boeing 737 MAX 10, an aircraft it previously did not believe in.

Alaska Airlines

The other airline that inherited a mixed fleet after an acquisition is Alaska Airlines, which incorporated Airbus aircraft in its fleet after acquiring Virgin America. The airline had a fleet of 10 Airbus A319ceos, 51 Airbus A320ceos and 10 Airbus A321neos with orders for 30 Airbus A320neos. Its Boeing fleet is far bigger, having 163 Boeing 737 Next Generation variants (11 -700s, 61 -800s, 12 -900s and 79 -900ERs). Alaska Airlines already has decommissioned some of the Airbus jets, but still has a big sub-fleet of Airbus A320 aircraft. The airline intends to return to a single-type structure, and to that extent, it could get a really good deal on the Boeing 737 MAX as its fleet is built on the Boeing 737 Next Generation, while it only has around 30 MAX aircraft on order.

Source: TravelUpdate

Alaska Airlines used to have a “Proudly All Boeing” sticker on its aircraft, and I think that says something about the company’s commitment to the Boeing 737, and even with the Boeing 737 MAX issues and the inherited Airbus fleet, it lies in line of expectations that the company will return to its all Boeing structure, and with 32 MAX aircraft on order, there remains a lot of space to eventually replace nearly 200 Boeing and Airbus jets in the fleet. The orders are currently equally divided between Boeing and Airbus, but the current fleet structure does seem to favor the Boeing 737 MAX, and even with possible retraining required for the Boeing 737 MAX, I believe that Alaska Airlines can negotiate a deal that will more than offset the added costs for added training requirements.

KLM Royal Dutch Airlines and Transavia

One customer that hasn’t really made any decision yet on how it will be replacing its Boeing 737 fleet is KLM Royal Dutch Airlines (OTC:KLMR) along with its subsidiary Transavia. KLM operates a fleet of 51 aircraft with an average age of around 13 years, which is not old, but it isn’t a young fleet either. Transavia and Transavia France operate a younger fleet of 82 Boeing 737 with an average of around 10 years.

KLM has not been in a hurry to order new jets, and they could very well be waiting to see what Boeing brings to the development table, if anything, before it makes a decision. Pre-COVID-19, the MAX or any competing platform didn’t seem to be part of their 5-year plan. However, the Dutch government is looking for KLM to reduce its carbon footprint significantly in exchange for government aid. So, in that scope, a Boeing 737 MAX order at a discounted price would somewhat fit.

Delta Air Lines

Source: Chris Lee

In a move that some consider desperate, Boeing allegedly has pitched the Boeing 737 MAX to Delta Air Lines (DAL), and with a strained relation between Delta Air Lines and Boeing, a deal between these companies is not straightforward. Relations between the two companies have been strained by a dispute between Boeing and Bombardier (OTCQX:BDRAF) regarding the C Series, which Delta Air Lines ordered and Delta Air Lines claiming it bought a Boeing 777 for a price far below market value where it omitted that the aircraft couldn’t actually be used for commercial service at the combination of price point and maintenance state the aircraft was in, but it did suggest that market prices for the Boeing 777 were inflated. Underlying these frustrations were loans via the Exim Bank to Gulf carriers, which grew their airlines using money from their state and gave airlines such as Delta Air Lines a hard time competing and one could say an unfair disadvantage.

So, Delta and Boeing have an history that isn’t a friendly one. Nevertheless, Boeing still has a 60% share in the fleet. Delta recently announced the Boeing 767-300ER and Boeing 717 will be leaving the fleet by 2025, which makes a lot of sense, and it will also retire its Boeing 777 and Boeing 737-700 fleet by the end of this year. None of this comes as a big surprise, but the result will be that, without adding any Airbus aircraft already on order Boeing’s share in the Delta Air Lines fleet will drop to 50%, and Delta has been able to use the strong position of Boeing in the fleet to lower prices on Airbus aircraft, but if Boeing’s share in the fleet starts tumbling, then that also means that Delta’s leverage decreases. While it does not look like it, Delta has a vested interest in balancing the fleet between Boeing and Airbus. We are currently seeing that the airline has an extremely young Airbus A321ceo and Boeing 737-900ER with orders for the Airbus A321neo that could eventually be partially swapped to the extended long range variant to cover some Boeing 757-200 operations as those aircraft are aging without any alternative on the horizon. In the 160-seat segment, the Airbus A320ceo and Boeing 737-800 fleets are aging with the fleet of around 140 aircraft having an average age of over 21 years. It can be expected that some of these aircraft will be phased out without replacement, but assuming that Delta will not fully opt for an upgauging approach using the Airbus A321neo, there will be chances here for Boeing to try and pitch the Boeing 737 MAX to Delta because, while it seems small, the opportunity certainly does exist. It is also known that Delta puts a lot of study into weighing efficiency and capability on one hand and acquisition price on the other hand, because that is how the company ended up with the Airbus A321ceo at end-of-life prices and purchased the Airbus A330-900 instead of fully committing to the Airbus A350-900. So, definitely, if the price is right, Delta could be looking into the MAX.

Conclusion

Given the state of the current market, you’d say that there are very few opportunities for Boeing to sell the Boeing 737 MAX to customers, and I would agree, were it not that the current uninviting state of the air travel industry and the Boeing 737 MAX crisis exert a very real pricing pressure on the Boeing 737 MAX, and that allows potential customers to buy the Boeing 737 MAX at a low price. Once cleared, customers would get a safe product for a price as if it is still a plagued product, while the only thing that is plagued about the Boeing 737 MAX once its cleared is likely is name. Considering that airlines are using these aircraft not just for the coming 5 years, which is when the market is expected to be recovered, but over a 10-15 year (aircraft half-life) and even 20-25 year timeframe, buying these jets for the future at today’s depressed prices does make sense… even for the plagued Boeing 737 MAX.

Now, all of this won’t change anything about the fact that the Boeing 737 MAX has lost and will lose hundreds of orders due to the two crashes, but there certainly are chances for the jet that, even in a time of global downturn, the air travel market should not be ignored.

Disclosure: I am/we are long BA, EADSF. 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.