Summary
It’s been a long time coming, but the airline that so many “love-to-hate” may find that it cannot grab a bargain a second time around with Boeing.
Analysis
Ryanair has been on the prowl for new jets for a while now and it’s aiming to close a potential deal for 200 units by year-end - the reality is that the airline is likely to stick with the 737 Next Generation family rather than emulate rival Easyjet and opt for an Airbus solution.
Airbus has already been on record to say that it would not lower prices for its A320-series family to win over Ryanair.
Boeing has thus far resisted rate cuts on the 737 line – there’s every possibility that a 15% cut is already on the cards – however, even if that doesn’t materialise, the company still has a swathe of customers it can deliver airplanes to through 2012 – the year in which Ryanair hopes to start taking delivery of its fresh batch of 200 airplanes.
The airframer may not want to adjust prices to reflect the indecisive state of the buyers market, however, Ryanair knows that Boeing will not want to set a precedent by offering prices that then means re-evaluating the value of the entire 737 backlog – particularly if other big 737 customers like American Airlines and Southwest Airlines come knocking on the door seeking contractual pricing adjustments.
For that reason, and aside from all the glib in the media about talking to both OEM’s, Ryanair knows that a switch to the Airbus family will involve more costs than it may want to swallow and will do a deal with Boeing behind closed doors.
The two of them will emerge proclaiming having done a “great deal” with the other, but in the grand scheme of things, Michael O’Leary knows that if he doesn’t order by year end, then the possibility of a 737 rate cut and/or blocked out positions for other customers means that if he decides to wander back to Boeing, he wont get the preferred delivery slots he seeks – especially if, as many envisage that an industry revival is on the cards for 2011-12.
Lets not forget, even an Airbus win would not benefit Ryanair when only a handful of slots would be found each year and would incur huge training and support costs for a small fleet – and then there’s the likelihood that Airbus will move early on in 2010 to trim rates across the A320 beyond 15% from today’s levels.
Then you also have to factor in the allure of the 2% fuel savings that the 737 will bring with the CFM Evolution engine, while Airbus continues is vegetative-state deliberations over putting a new engine one the A320 family with the Pratt & Whitney GTF – a concept that has won very little support from A320 operators.
He will also be mindful that as other competitors in the UK, such as British Airways, reposition their short-haul products to better compete with low-cost carriers, the lure of better pricing policies, check-in desks as well as flights to major hubs and primary airports in Europe will put Ryanair on notice that their much-vaunted cliché of ferrying more passengers than British Airways could well be reversed as quickly as it ascended.
Some said that British Airways would never buy Airbus for long haul, but they did – could Ryanair do the same?
Hypothetically, it’s a distinct possibility – but a dose of reality is needed.
Ryanair may not get the lower 737 prices than its last deal - despite the depressed state of the market, the costs associated with walking away from the 737 to A320 is one that even O’Leary must shudder with fear at when thinking about it.
And who could blame him.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
