In the global commercial aviation duopoly, one company's win is bound to be the other's loss. When Emirates canceled an order for 70 Airbus (NASDAQOTH:EADSY) A350s in June and ordered 150 Boeing (NYSE:BA) 777s in July, Boeing supporters cheered. This time around, Airbus tasted sweet revenge with a huge deal from Delta Air Lines (NYSE:DAL) for 50 wide-body planes a few weeks ago. While winning and losing orders is routine in the business of selling aircraft, some orders become more important because of their size, strategic importance, and possible future impact. Let's evaluate how this deal changes things for Boeing and Airbus.
Airbus' big win
Atlanta-based Delta Air Lines has decided to go with Airbus A350 and A330neo aircraft to replace its existing Boeing 747 and 767 models, respectively. The airline had been planning to order new jets for some time now and it was considering both of the jet makers. However, impressed with what the European plane maker had to offer and how soon it could be delivered, Delta decided to order 50 Airbus wide-body jets -- 25 A350-900s and 25 A330-900neos -- worth $14.3 billion at list prices.
The A330neo with new-generation Rolls-Royce engines is the upgraded version of the A330, which has been one of Airbus' most successful models. And the A350 is Airbus' latest clean-slate wide-body aircraft, which will start its commercial journey later this year. The deliveries are expected to start from 2017 for the 747 successor and from 2019 for the 767 successor. The new A350-900s will fly on long-range routes primarily between the U.S. and Asia, while the A330-900neos will fly medium-range distances between the U.S. West Coast and Asia. Delta expects 20% operating cost savings per seat compared with the retired aircraft.
Scott Hamilton from aviation consultancy Leeham said in his report that the utter size of the deal and the addition of Delta's name to A330neo's list of customers are big wins for Airbus. With most of the U.S. airlines completing their fleet expansions for the year, new orders won't fall that smoothly into aircraft makers' laps.
The deal could have helped Boeing's 777 transition
Boeing had offered Delta two of its finest jets -- the 787-9 Dreamliner and the 777-300ER -- but still it couldn't strike a deal. And this could have several repercussions. For starters, the reengineered 777X will enter service in 2020, and going by the 777's backlog, its production at 8.3 planes per month would stretch till 2017. This translates into a three-year production gap that Boeing needs to fill.
The 777 forms a big part of Boeing's revenue generation, as it is the company's highest-selling wide-body aircraft. And three years' worth of production at the current rates means we're talking about 299 potential airplanes. The 777-300ER model that Boeing has mainly sold in the last few years lists for $330 million. So, we're talking about potential revenue of $98.6 billion excluding discounts. Even if we consider a 45% discount to be the average, it's more than $54 billion that's at stake. Boeing investors need to watch how Boeing progresses with new 777 orders, as a slowdown could have big revenue implications.
If Delta had ordered 25 777s, it could have not only kept the assembly lines running for another three months at the current production rates, but would have also soothed investors who might be anxious about the 777 transition.
...and bolstered Dreamliner's order book
The 787-9's list price is $257.1 million, and though deep discounts are offered to airlines, 25 of these would have garnered around $2.9 billion (keeping the discount average at 45%). Boeing produces 10 787s per month, and has a backlog of 850. It plans to increase the monthly production rate to 12 in 2016 and to 14 by the end of the decade. But as more numbers add to the backlog, Boeing might think of speeding up the production rate earlier.
Boeing has been struggling with various developmental hiccups of the clean-slate Dreamliner, and deferred cost of the program has already crossed $25 billion. Speedier deliveries could have helped monetize the backlog faster and recover those billions. Though Boeing feels its Dreamliner is far more advanced compared to the A330 variant that was designed in the 1990s, it keeps losing orders to the A330neo. Delta Air Lines wanted a quick turnaround time.
There's absolutely nothing to indicate that Boeing is losing its grip in the wide-body segment. But the Delta order would have fit well with Boeing's future production schedule as it transitions its best-selling 777 aircraft to the next-generation model, and might have given the company reasons to speed up Dreamliner production. But net-net, the deal is a big win for A330neo, and it should give Airbus investors reason to cheer.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.