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Why Boeing's 737 MAX 10 Deal With United Continental Is So Important

By Adam Levine-Weinberg – Jun 21, 2017 at 11:35AM

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Boeing just got a big endorsement for its new 737 MAX 10 from one of the largest airlines in the world.

On Tuesday, Boeing (BA 1.59%) announced its biggest deal (in terms of sheer numbers) of the Paris Air Show: an order for 100 737 MAX 10s from United Continental (UAL 1.56%).

Several pundits noted that none of these are truly new orders. Instead, United is converting most of its existing 737 MAX orders to the new 737 MAX 10. Despite this important caveat, getting United to order the 737 MAX 10 was extremely important for Boeing as it tries to fend off tough competition from Airbus (EADSY 1.69%).

A rendering of the Boeing 737 MAX 10

United Airlines has converted 100 Boeing 737 orders to the new MAX 10 variant. Image source: Boeing.

United is a big aircraft buyer

United Airlines is one of the largest airlines in the world, and it operates more than 500 narrowbody planes on domestic and short-haul international routes.

The Boeing 737 is the backbone of United's narrowbody fleet. By the end of 2017, United Airlines will operate 329 Boeing 737s (mainly the 737-800 and 737-900ER variants). However, United also uses dozens of aging Boeing 757s on domestic routes. Finally, it has more than 150 Airbus A320 family aircraft.

More than half of these narrowbody planes are at least 15 years old. U.S. airlines (including United Airlines and its merger partner Continental Airlines) went through major fleet overhauls during the 1990s. Based on the retirement schedule for these aircraft, United Continental will need to buy a huge number of narrowbodies between now and the late 2020s.

With the exception of a handful of used planes acquired in the past year or so, all of United's A320-series aircraft were built between 1993 and 2002. More than 100 of its Boeing 737s -- and nearly all of its 757s -- were built in 2002 or earlier, as well.

A United Airlines Boeing 737

United will need to start replacing its oldest 737s by the mid-2020s. Image source: United Airlines.

As a result, United will need about 300 narrowbodies between now and 2030 for replacement purposes. Including growth opportunities and the replacement of some regional jets with small mainline planes, it could be looking to buy 400-500 narrowbodies through 2030.

United is a fan of the newest 737 variant

Entering this week, United Continental had 161 orders for the Boeing 737 MAX. Five years ago, it ordered 100 737 MAX 9s. It also converted an order for 61 smaller 737-700 jets to the 737 MAX last fall, without specifying delivery dates or the subtype.

The deal Boeing announced with United Continental on Tuesday covers the 61 unspecified 737 MAX orders as well as 39 of the 737 MAX 9 aircraft that United had previously ordered. Clearly, United appreciates the unit cost advantages offered by the newest, largest member of the 737 family.

Boeing solidifies its hold on a key customer

It's pretty clear from Boeing's actions in recent years that the aerospace giant really wants United to become an all-737 carrier for its narrowbody operations.

The biggest stumbling block has been the Airbus A321neo's unit cost advantage over the 737 MAX 9. Many previously loyal Boeing 737 customers have ordered Airbus' A321 or A321neo in the past few years, because Boeing didn't offer anything comparable. By contrast, the 737 MAX 10 adds two rows relative to the 737 MAX 9, making it roughly equivalent to the A321neo in terms of seating capacity and unit costs.

With 100 737 MAX 10s on the way, United has no clear need for the A321neo anymore. And since most of its A320-series aircraft are set to retire in the next decade, the prospect of moving to a single narrowbody fleet type will look increasingly attractive to the carrier.

United Continental may not have increased its 737 MAX order on Tuesday. But its conversion of 100 orders to the new 737 MAX 10 signaled that Boeing is in position to win hundreds of additional 737 MAX orders in the coming years as United continues updating its fleet.

Adam Levine-Weinberg owns shares of Boeing. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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