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Don't Let 'Em Bully You, Boeing

By Rich Smith (TMF Ditty)
November 4, 2009 | Comments (7)

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They're at it again. Another airline, kicking sand in the face of Boeing (NYSE: BA) while it's down.

This summer, we saw Russia's nascent Rosavia holding company try to wheedle price concessions out of Boeing by pitting it against archrival Airbus in a classic bait-and-switch. The bait: An offer of 50 "firm" orders for new aircraft, with a potential 70 more orders to come. And the switch: Rosavia wanted to pay no more than $50 million per plane, a substantial discount off even the lowest list prices at Boeing. At the time, I urged Boeing to walk away and refuse to be lowballed. It didn't. And that seems to have lent encouragement to ...

Ryanair, pirate of the skies!
This week, we learned that yet another major airline is working to get Boeing to walk the plank on price concessions. And if Boeing didn't feel capable of passing on Rosavia's offer, there's little chance Boeing will walk away from Ryanair's gambit to grab price concessions on a reported 200-airplane order.

The facts
Once again, we're talking Boeing 737s listed at $51 million and up. And once again, Boeing's being informed by a customer that this bottom list price needs to be more negotiable.

The argument
Granted, according to Ryanair's CEO, only "a very small amount of money" is at issue -- but that's not keeping Ryanair from playing hardball, taking its argument to the press, and accusing Boeing of all sorts of things that give shareholders the shivers. According to Ryanair, Boeing "isn't prepared to share with us in the form of lower prices," and is suffering from a "leadership vacuum," which makes it impossible to know "who's making decisions there" -- the implication being, no one is.

And what Boeing should do about it
But if you ask me, Boeing is making a decision here -- and it's the right one. Everyone knows the airplane industry is in a slump today. And if you don't believe me, refresh your memory by reviewing recent earnings from Textron (NYSE: TXT), General Dynamics (NYSE: GD), or Embraer (NYSE: ERJ). From small to large, business jets to jumbo jets, international airplane sales have hit a real pocket of turbulence.

Boeing's suffering, too, as margins at its Commercial Aircraft division slip into the single digits. That's just half the margin Boeing rakes in at its defense division. And when you consider the amount of price pressure the Pentagon's bringing to bear there, Commercial Aircraft's compressed margins stand out as especially weak.

Ryanair seeks to take advantage of the situation by publicly berating Boeing for its failure to secure a major sale. But here's the thing -- a sale today is a sale that won't happen tomorrow. (Ford (NYSE: F) shareholders still dancing in the streets over yesterday's surprise Profit-for-Clunkers, take note.) Why, I ask you, should Boeing agree to earn low profit margins on 200 planes to be sold today, when by waiting a few quarters, it might well be able to sell the same planes to Ryanair (or a different customer), for a higher profit margin?

Um ...
Don't worry. I won't make you explain the logic -- because there isn't any. It was a rhetorical question to the nonsensical concession that Ryanair is pushing.

The simple truth of the matter is that Boeing cannot salvage its profits by making bad deals today. The situation might be different if Boeing didn't have options and its factories would sit idle, but that's not the case at this point. Boeing's best bet is to coast on its backlog of commercial work and its strong profit margins in defense, ride out the civilian air downdraft, and wait to sell those planes tomorrow (figuratively speaking).

Foolish takeaway
Such a decision won't be popular with suppliers like General Electric (NYSE: GE) or United Tech (NYSE: UTX), to be sure. They'd love to see a short-term boost in backlog and sales into this flagging air sector. It won't be popular with Ryanair, Rosavia, or other bargain shoppers in the airline industry. But it's the right thing to do for Boeing shareholders.

Take the Motley Poll

Hear, hear! Boeing needs to hold the line on prices, and not make unprofitable deals today. I'm a patient Fool. I can wait for better profits.
Are you crazy? If Boeing doesn't take these deals now, Airbus will swoop in and scoop 'em! Where will your "sales tomorrow" be then, smart guy?

Agree? Disagree? Vote below, and expand on your thoughts ... below-er.

View Results

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Fool contributor Rich Smith owns shares of Boeing. Motley Fool Stock Advisor has recommended Embraer. Oh, and General Dynamics is a Motley Fool Inside Value pick. I think that covers it. The Motley Fool's disclosure policy loves to fly, and it shows.

Read/Post Comments (7) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On November 04, 2009, at 5:12 PM, jrusso9722 wrote:

Unprofitable sales are just that, UNPROFITABLE. Avoid them. Who cares if EADS winds up with the sale, if you can't make a profit, why do the sale. Let's see how Ryanair backs down.
Report this Comment On November 04, 2009, at 10:44 PM, busterbuddy wrote:

So I think Ryanair is correct about a leadership vacuum .
Report this Comment On November 05, 2009, at 5:21 AM, yarnboy wrote:

Boeing thinks of each plane as an annuity. Someone with more knowledge than me can tell you what they make on each plane yearly in parts and service. So a plane with a forty year lifespan will more than make up for a loss upfront.
Report this Comment On November 05, 2009, at 10:12 AM, TMFDitty wrote:

Great comment, yarnboy! Thanks for the feedback.
(Albeit, losing the KC-10 service contract suggests that this plan will not always work out.)
--TMFDitty
Report this Comment On November 06, 2009, at 4:48 AM, doodsky wrote:

Ryanair and Roasavia are scared that they will not be able to bargain again once the 2 new Boeing planes starts dominating the skies. That's why they are trying desperately to bring Boeing to it's knees to maybe beg for them to build their new planes at bargain price. All this bullying about the manufacturer of your aircraft does not help the company's relationship in the long run. On last thing, you get what you paid for and this I know for sure, Boeing makes quality planes vice quantity Airbus is doing. That's why Airbus is the largest manufacturer right now, they sacrifice quality for quantity. So who's counting the beans right now?
Report this Comment On November 07, 2009, at 10:15 AM, bocainvestor wrote:

Ryanair tried to play Airbus against Boeing, but Airbus told Ryanair 'we make a higher quality product and if you want that product, you will have to pay for it, without heavy discounts. Furthermore, Airbus already have a confirmed and growing order book for an additional 2,500 A320's - a healthy figure. Boeing shouldstand firm. They know the position of Airbus and if Ryanair really want new aircraft, they will order them and at the price set by boeing.
Doodsky - which 2 new boeing planes will dominate the sky? 747-8i, which with just one customer may never materialise and the other must be the 787. The later has potential, but while it has grabbed the headlines and around 800 orders, Airbus have quietly amassed around 500 orders for its more expensive and larger A350xwb, and there are still a few years to go until its first flight. The bottom line is that in monetary terms, the 787 and A350xwb are not too far apart. While the 'hare' raced off, the 'tortoise' seems to have nearly caught up. Anyway, one aircraft manufacture dominating the airline industry would be a disaster for us all - higher prices and little incentive to innovate.
Report this Comment On November 07, 2009, at 11:49 AM, aamcadams wrote:

Both sides, represented by the Fellow Fools have made valid points. I would respectfully suggest either split the difference with our loyal Irish friends, or let them continue into their EURO-Centric reality. As for the Russians, one of these year[s] they will finally figure out we have much more in common than either of us would like to admit! [insert your world politik here, back to stocks] In summary, it's not a good deal unless everyone wins. That said, maybe Boeing should add another [1] line/hanger/thing so they don't wind up with such a back-log in the future. Any car salesman can tell you, it aint sold until its delivered. This is just one more example of Europe making their problems, our problems. Now sales is a problem-solving biz, but after DHL & Chrysler [MON, ADM, MSFT & INTC, ect.], you'd think we would learn! America First!

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