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.
