No Ryanair 737 Order Doesn’t Mean Panic

Ryanair may have not have placed an order for as many as 200 airplanes, but this is more of an indication that the airline is concerned about revenue growth than it is about capacity growth.

Double-booked 737 slots appear to be the driver behind this decision.

Ryanair mentioned in its half year earnings that revenue per passenger was down 15%. The airline has early build, high cycle 737-800s that it wants to replace. Many of those potential 200 jets would have been earmarked for this purpose. Ryanair still has around 100* Boeing 737-800s yet to be delivered.

Give the deferral of 737s Boeing has seen since mid-2008, many of these airplanes will be delivered in the timeframe (2012-16) that Ryanair had wanted to start taking deliveries.

As I noted before here, Ryanair will not run the risk of incurring the significant costs by entertaining an A320 order (which seat less than the 737-800) nor will they be compelled to look at the even smaller Bombardier CSeries than has about as much market appeal as the A340 does (order numbers do not lie).

Ryanair is at a juncture where it has expanded with so many routes, growth opportunities are shrinking. Unless Michael O’Leary bites the bullet and decides to go long haul, that is. Adding excessive capacity will decimate yields and load factors would be hit too.

Because the airline now cannot churn its early build airplanes when it had hoped, O’Leary is rightfully turning his efforts to increasing passenger revenue. No amount of volume will make up for that and I suspect the failure to conclude a deal with Boeing will not be looked upon negatively by either party.

Boeing has over 2000 firm orders for its Next Generation 737 family, it has resisted production cuts so far and any revision to that will stretch the order book out. Airbus too is mulling production cuts on its narrowbody lines so there is even less scope to make the argument to rollover to a rival OEM given the costs involved.

The 737-800 is a much sought after airplane, Boeing can afford to sit tight and wait for Ryanair to come back and place another order – but not on terms that had previously been agreed.

The landscape has changed dramatically.

Boeing has a healthy backlog on the 737, the fact that Ryanair couldn’t agree on delivery dates shows that Boeing has other customers ready to spend money to pay for those slots. Ryanair will have extreme difficulty in securing those slots, even if one or a handful of other customers defers, other carriers will step in and acquire them quickly – primarily because those that want delivery will pay the premium for it – a premium Ryanair has thus far avoided.

Eventually Ryanair will make a decision on placing this order; it’s just a matter of when.

They’re neither Boeing’s only customer, nor the biggest and the company is ready to show that it will not yield to tactics that erode the 737s inherent market value.

 

On the face of it, Boeing has lost nothing whereas the same cannot be said for Ryanair. 

 

 

 

 

*Data as at November 2009.