Aerospace & Defense

Latest Boeing Sale to United Is About More Than the Planes

Just a month ago, Boeing Co. (NYSE: BA) announced an order for 40 of its 737-700s to United Continental Holdings Inc. (NYSE: UAL) in a bitter loss for Canadian airframe maker Bombardier and its all-new CS100 passenger jet. Now it appears that Boeing is about to sign a second deal with United for 25 more 737-700s.

The 737-700 is the smallest and cheapest plane on Boeing’s price list. The 118-seater carries a list price of $80.6 million. But reports indicate that the company sold the first 40 planes to United for a contract price in the low to mid $20 million range. Bombardier, which recently wrote off $3.2 billion in development costs for its CSeries planes, simply cannot undersell Boeing, which long ago recouped all its costs on the 737-700 and can afford to support heavy discounts on the aircraft. Especially for United, one of Boeing’s best customers for decades.

The Wall Street Journal noted that Boeing commercial division CEO Ray Conner recalls the effect on the company that resulted from failing to undercut Airbus when that fledgling company sold its first planes to United in 1993. Airbus did not appear to be a serious threat to Boeing at that time, just as Bombardier does not now. Boeing is determined not to fall asleep on the tarmac again.

Apparently the other thing that Boeing has learned is that it needs to go ahead with a re-engined version of the 737-700, the 737 MAX 7. Boeing’s order book for the 737 MAX 7 includes just 55 orders out of 3,072 for the new MAX series. Only Southwest and WestJet have ordered the smaller planes, which have shorter runway requirements for airports such as Chicago’s Midway and Bob Hope airport in Burbank, Calif. According to Leeham News, Southwest does not want to buy the larger 737 MAX 8, and Boeing, wanting both to satisfy a captive customer and keep Bombardier out of Southwest’s fleet, has decided to stop trying to upsell MAX 7 customers to the MAX 8 and get behind development of a MAX 7.

The low end of the single-aisle market is getting yet another competitor with Embraer S.A.’s (NYSE: ERJ) new EJet-E2. Boeing’s sales to United effectively blocked Embraer’s chances as well as Bombardier’s.