On Wednesday, International Consolidated Airline Group's (LSE:IAG) British Airways picked European Aeronautical Defense and Space's (NASDAQOTH:EADSY) Airbus' SAS short-haul planes over Boeing's (NYSE:BA) 737, in a deal worth more than $20 billion.
This move is part of IAG's effort to modernize its airline fleet, increase profits, and expand the capacity of its recently acquired Vueling Airlines. It's also a blow to Boeing, as IAG is the third largest airline group in Europe and is moving toward operating a single type of short-haul aircraft. Here's what else you need to know.
Discount airlines go head-to-head
In April, IAG acquired full control of Vueling Airlines, which is ranked fourth of the top 10 low-cost carriers in Europe, by Absolute Aviation Advantage. More pointedly, IAG plans to increase its overall capacity by 5.2% this year -- which includes increasing Vueling's capacity by 2.4% -- and is part of IAG's effort to compete with European low-cost carriers such as EasyJet and Ryanair Holdings, which have so far dominated the low-price travel market.
For Airbus, that means a firm order for 62 A320s -- a value of $5.4 billion without discounts, an option for an additional 58 A320s for Vueling, plus an option for an additional 100 A320s, which IAG could deploy anywhere. In total, the deal, before discounts, is estimated at $21.7 billion.
The rivalry continues
Airbus and Boeing have been battling for airline sales for years, and with an estimated $100 billion-a-year jet market, that's not likely to stop anytime soon. Still, IAG's latest decision is a blow to Boeing, as British Airways used to be a major buyer of 737s, but since its 1998 order for Airbus' A320s, it has moved more toward operating one type of short-haul aircraft -- IAG now operates 18 737s, compared with 231 A320s. However, for it's long-haul aircraft, IAG still uses Boeing, and it even took a delivery for the Dreamliner in June.
What to watch
The Airbus order still has to be confirmed by IAG shareholders later this year, but if they do approve it, this will be a big win for Airbus. This move could also help IAG in its competition with EasyJet and Ryanair, as the new A320s would replace older, gas-guzzling airplanes, which would decrease fuel costs. As such, this is something to watch.