Last December, Ryanair (NASDAQ:RYAAY) gave Boeing (NYSE:BA) a big boost by placing an order for 75 additional 737 MAX 200 jets. That made it the first airline to place a major order for the troubled jet family following a nearly two-year lull, driven by the 737 MAX grounding and the COVID-19 pandemic.
Adding to Boeing shareholders’ excitement, Ryanair CEO Michael O’Leary indicated that the European airline giant hoped to place a second big order (including the 737 MAX 10) within 12 to 18 months. However, last week, Ryanair announced that it had ended discussions with Boeing about a follow-on 737 MAX 10 order, as the two sides had been unable to agree on pricing.
Ryanair teases a second order
The order Ryanair placed in late 2020 brought its 737 MAX order book to 210 units. Deliveries are scheduled to run through 2025, helping the airline grow its fleet from around 470 aircraft last year to 600 by the summer of 2025.
With this order, Ryanair satisfied its new aircraft needs for the next several years. But it will undoubtedly want to continue growing and replacing older aircraft after 2025. Considering the budget airline’s clear preference to operate an all-737 fleet to simplify its operations and hold down costs, Ryanair’s interest in placing a follow-up order was wholly unsurprising.
During 2021, Ryanair has continued to express interest in placing a large order for the 737 MAX 10. However, management has consistently stated that the order depended on receiving favorable pricing. Most recently, O’Leary said in late August that he didn’t expect to finalize an order until 2022 — but he added that Ryanair could order as many as 250 737 MAX 10s if Boeing dropped its asking price.
Walking away from the negotiating table
Last Monday, Ryanair took the unusual step of issuing a press release stating that it had ended negotiations with Boeing regarding a potential 737 MAX 10 order. O’Leary commented: “We are disappointed we couldn’t reach agreement with Boeing on a MAX10 order. However, Boeing have a more optimistic outlook on aircraft pricing than we do, and we have a disciplined track record of not paying high prices for aircraft.”
O’Leary noted that Boeing recently lost out to Airbus on orders from Delta Air Lines and Jet2.com. He opined that Boeing was underestimating the pandemic’s continuing impact on the global airline industry and that the aircraft manufacturer ought to be more motivated to secure additional orders. The Ryanair CEO indicated that he was willing to wait for many years to secure better pricing before placing a new order.
For its part, Boeing said that it valued Ryanair’s business but that it was also committed to staying disciplined with respect to pricing. In short, the two longtime partners have reached an impasse.
Boeing needs more customers
Diversifying away from the 737 family would be so costly for Ryanair as to be impractical over the next decade or so. That means the carrier will eventually need to expand its 737 MAX order book. That said, by keeping its 737-800s around longer and slowing its growth rate slightly, it could potentially postpone placing a new order for several years.
Ultimately, Ryanair’s ability to negotiate better prices from Boeing depends on which company becomes desperate for a new order sooner. For now, Ryanair appears to have the advantage.
Indeed, while Boeing booked 524 gross 737 MAX orders in the first seven months of 2021, United Airlines and Southwest Airlines accounted for nearly 75% of those orders. Factoring in cancellations, those two customers represent well over 100% of Boeing’s year-to-date net orders for the 737 MAX family.
However, United and Southwest have now placed orders covering the bulk of their aircraft needs through the end of the decade. They won’t order nearly as many planes over the next few years as they have in 2021.
Thus, Boeing needs to get other customers to start placing 737 MAX orders in more meaningful numbers — and soon. If it fails to do so, its backlog will shrink rapidly as its delivery rate accelerates over the next couple of years. That would virtually force it to drop its prices to entice Ryanair to order more jets. By contrast, if Boeing can prove (via an acceleration in 737 MAX order activity) that it isn’t desperate for additional orders, Ryanair will eventually need to give in and agree to Boeing’s asking price for the 737 MAX 10.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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