As the trading week draws to a close, it's standing room only 'round Boeing
Scheduled to take flight Tuesday (weather permitting), the Dreamliner will bear aloft the hopes and dreams of many a Boeing shareholder. And not just us shareholders. You can bet Boeing suppliers from General Electric
In fact, speaking of "bets," we noticed last week how Wall Street's smart money seems to be positioning for a positive outcome, as traders take positions in titanium plays like Titanium Metals
But I digress ...
There's little doubt that the success (or lack thereof) of next week's 787 test flight will affect Boeing's trajectory in the near term. But at the same time they're watching to see how this particular tree falls, Fools shouldn't lose sight of the rest of the Boeing forest. Of particular note this week was UAL's
To my mind, this marks a victory for Boeing, even though it didn't win all of UAL's business. As you may recall, this was supposed to have been a winner-take-all competition for a 150-plane contract. When it was announced back in June, I argued that UAL was putting the screws to the rival airplane makers, playing to their greed and desire to win the whole contract as a way to extract price concessions from the "winner." As such, I argued that Boeing should refuse to play ball – walk away from the bidding if necessary, rather than sacrifice profit in pursuit of mere revenues.
A Pyrrhic loss
It's for this reason that I believe what UAL did not buy this week holds more significance than what it did. It did not buy 150 planes from a single manufacturer. It did not place an order for all 150 planes at once, rather ordering just 50 planes total up front, with options to buy 50 more planes each from Boeing and Airbus.
To me, this means that even as it faced tremendous pressure to grant price concessions, Boeing held the line on its profit margin. It did not give UAL a deal "too good to resist" -- because obviously, UAL did resist, opening its wallet only partway, perhaps hoping to get better prices as future plane purchases are finalized.
So bully for Boeing on that.
And another thing
Conversely, some investors may be disappointed to have learned that Boeing lost out on a 200-plane order from Ryanair this week -- but not me. In fact, I was a little disappointed to learn that Boeing had agreed with Ryanair on a final price, fearing that, just as with the UAL deal, "success" of this sort would come at a cost to Boeing's profit margins. Turns out, it almost did -- but at the last moment, Boeing tried to snatch "defeat" from the jaws of "victory" in renegotiating certain ancillary terms of the sales contract -- things like the warranty coverage it would offer on the planes Ryanair wanted to buy.
Rolling back such warranty guarantees would, in all likelihood, result in lower costs to Boeing -- and higher profit margins. For this reason, I see Ryanair's balking at the new conditions as a victory of sorts for Boeing. Yes, it lost the sale (at least for now), but it once again, it did so in an effort to preserve profit margins.
Since Boeing could have potentially reported a total of 350 new plane sales this week, I suppose you could say that the actual sales tally of "25" means bad news. But with a still-healthy backlog in place, Boeing made the right decisions. When you get right down to it, the purpose of a company is not just to make sales – it's to make profitable sales. Boeing's doing its darnedest to remember that.