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Boeing lands a showstopper deal to sell 200 new 737 Max planes

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Boeing 737 Max planes have been grounded since March. Above, some of those planes, prepared for Southwest Airlines, sit at the Southern California Logistics Airport in Victorville.
(Mark Ralston / AFP/Getty Images)
Bloomberg

The Paris Air Show is typically an Airbus stronghold where the European plane maker unveils its biggest orders, relegating Boeing Co. to bit player.

This year was shaping up to be particularly difficult for the U.S. manufacturer, which is reeling from two deadly crashes that grounded its all-important 737 Max jet. Boeing Chief Executive Dennis Muilenburg came to the event with a focus on “humility and learning” rather than chasing deals.

That was until the second day, when Boeing pulled off a stunning turnaround with the help of one of the world’s most respected airlines. British Airways owner International Airlines Group signed a letter of intent for 200 of the single-aisle Max planes — a commitment valued at $24 billion that gives Boeing the opportunity to turn around the negative narrative surrounding its biggest source of profit.

Boeing stock jumped 5.4% on Tuesday.

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IAG chief was a pilot

Boeing couldn’t have hoped for a stronger endorsement to win back trust from wavering customers and a jittery public. IAG Chief Executive Willie Walsh — himself a former 737 pilot — personally vouched for the Max, saying that he’d board one himself if he could and that he had been on a simulator to run through Boeing’s proposed changes. It’s among the biggest orders ever placed for a single-aisle model in Europe, and IAG is essentially building the future of its low-cost operations, including Level and Vueling brands, around the Max.

“Both sides get something great: Boeing gets an incredibly well-timed endorsement, and IAG gets to buy planes at a very heavy discount, probably, with no risk,” said Richard Aboulafia, vice president at the Teal Group, an aviation consulting firm based near Washington, D.C.

Although Boeing drew a blank on the air show’s opening day (and watched Airbus pull in $13 billion in deals), Tuesday began more upbeat for Boeing. The Chicago company landed an order for 20 787 Dreamliners from Korean Air Lines. Then came the IAG deal — the first commercial endorsement for the Max since the model was grounded.

Hugs all around

Negotiations came down to the wire, and it wasn’t clear until Tuesday afternoon that Boeing would clinch the deal, according to a person with knowledge of the matter. Airbus was blindsided, another person said. After Walsh penned a contract with Boeing commercial airplanes chief Kevin McAllister, Boeing staffers high-fived one another and hugged. McAllister said he was “truly honored and humbled” by Walsh’s endorsement.

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The backing from IAG also bolsters Muilenburg’s bet to stick with the Max as the cornerstone of Boeing’s short-haul strategy. The CEO has dismissed the notion that his company may need to fast-track development of an all-new single-aisle model because of the risk that the Max turns out to be mortally wounded. Instead, Muilenburg said, the Max would remain for decades to come, until technology has matured sufficiently to justify the huge investments needed for a brand-new model.

Still, Boeing has kept the door open to changing the Max’s name if that becomes necessary given the model’s link to the tragedies. IAG, for its part, didn’t mention the Max name in its release announcing the commitment, referring to it instead as the 737-8 and 737-10 aircraft.

Likely discounts

Airbus and Boeing readily provide nominal values of orders based on list prices, but the actual money changing hands for jetliners is a closely guarded industry secret. Given the pressure on Boeing to secure a marquee order, IAG probably locked in a good deal, with the added benefit that big orders tend to come with steeper discounts. Opting for a letter of intent rather than a firm order contract also gives IAG an insurance policy of sorts for a jetliner whose immediate future is still uncertain, Teal Group’s Aboulafia said.

Muilenburg said he is confident the Max will return to service before the end of the year. The grounding was enforced globally after a 737 Max crashed in Ethiopia in March, following a 737 Max crash in Indonesia in October. In both cases, a software system received erroneous readings from a sensor and repeatedly forced the planes’ noses down until pilots lost control. Everyone on board the planes was killed, a total of 346 people. Boeing has vowed to undertake a deep review of the plane’s design, as well as its certification and communication procedures.

IAG’s Walsh, who is Irish and wears a buzz-cut hairstyle, has a reputation as a no-nonsense corporate leader. He said he gained confidence in the Max during sessions on the flight simulator. Those included a version with a software update Boeing is preparing for the Maneuvering Characteristics Augmentation System — the system implicated in the crashes.

“It was very helpful to see it in operation and understand the changes Boeing were proposing,” Walsh said.

Short-haul fleet

The Max is arguably Boeing’s most important aircraft, competing with the Airbus A320neo family. Years ago, Airbus was first to come out with an upgraded version of its bestselling short-haul model, rapidly picking up huge orders — including from some marquee Boeing customers — and essentially forcing the U.S. company to respond. Boeing managed to come back and secure more than 4,000 orders for the Max, thanks to a promise of major fuel-cost savings from new engines and improved aeronautics.

Winning business from Walsh also gives Boeing the satisfaction of converting a loyal Airbus customer. While IAG has a mixed fleet on long-haul routes — consisting of Boeing 787 Dreamliners, Airbus A350s and some A380 double-deckers — it uses no Boeing models on short-haul flights, having built that operation entirely around Airbus and some smaller Embraer aircraft.

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IAG ordered a mix of the 737 Max 8, which seats as many as 178 passengers in a two-class configuration, and the larger 737 Max 10, with room for about 230 passengers. It will use the aircraft predominantly for its Vueling and Level low-cost operations, as well as its British Airways fleet serving London Gatwick Airport. IAG also owns Spain’s Iberia as well as Aer Lingus.

The Max remains a rare species in Europe, with only a few airlines so far flying the latest upgrade of Boeing’s workhorse, first introduced in the 1960s. Low-cost specialist Ryanair Holdings was previously the biggest Max buyer in Europe, with a commitment for 135 units. Globally, Dallas-based Southwest Airlines Co. is the biggest customer, with 280 on its order books.

“I wouldn’t ask anybody to do something I wouldn’t do myself,” Walsh, who flew 737 jets for about 18 years, told reporters at the Paris Air Show. “If you ask me, I would get on board a Max tomorrow.”


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