Boeing (BA, Financial) won a big 737 Max order from a Japan-based aircraft leasing firm SMBCAviation Capital as demand for commercial planes is rising in the Asia Pacific region. The 737 Max is the upgraded version of Boeing bestselling plane, the 737. The top brass of Boeing as well as SMBC say that most of the demand for single aisle narrow body jets would be coming from low cost carriers (LCCs) as air travel is gradually getting popular in this region. Let’s take a look at the deal and find out how important it is for the American aircraft manufacturer.
The deal in brief
SMBC has orders for 80 Boeing 737 Max 8. This is the biggest single order Boeing’s received for the re-engineered version of the 737 since the time it was unveiled in the latter half of 2011. The 737 Max 8 carries a list price of $107 million, and so the deal is valued at $8.5 billion of business for the company. However, large orders conventionally come with good discounts for the carriers. SMBC said that the delivery of the order is scheduled to begin in 2018 and continue till 2022.
Boeing 737, Picture from Wikimedia Commons
Before placing this order, SMBC had entered into a deal to purchase Airbus’ (EADSY, Financial) narrow body offering in July. The agreement is valued at $11.8 billion in list price. Economic development in China, India and other Southeast Asian economies are expected to boost the order backlog of the 737 and A320 further. In fact, Airbus forecasts that China is going to soon surpass the U.S. as the largest airplane market in the world. The order is a clear reflection of the increasing demand for short haul single planes in the Asian market. LCCs are witnessing tremendous passenger traffic growth an anticipate it to continue to rise at the current pace. So ordering fleets to serve future demand becomes essential.
The 737 Max has to date bagged around 2,400 orders, which is a huge number. Its predecessor, or the 737 also makes for a solid chunk of the total backlog of Boeing. After the third quarter, the 737 firm orders make for around 75% of the total backlog of the company.
Why the deal is important
The narrow body market is going to expand in a big way in the next 20 years. Boeing predicts that it will make for roughly half the total $5.2 trillion commercial jet deliveries during this period. And as competition with archrival Airbus is heating up, it is crucial for the Chicago based company to maintain its position in the commercial airplane market. In this regards every order won counts, and every order going in favor of Airbus is an opportunity lost by Boeing. So increasing market share is significant for the aero maker in the long run.
Picture from Airbus
Airbus already has a lead over Boeing in terms of the A320neo order count. Since Airbus had launched the re-engineered program before Boeing, it got a head start. Currently its total orders for the A320neo comes to around 3,124 units, while that of Boeing is a little over 2,400. Boeing’s decision of whether or not to go for a 737 upgraded version cost the company the first mover advantage that Airbus enjoyed. The latter took over all the initial orders for its A320neo. However, orders such as the latest one is helping Boeing to slowly inch closer to the European jet maker.
Parting thoughts
Boeing’s 737 Max is fighting its way out for head to head contest with the A320neo. Continuous flow of orders is going to play an essential role to widen market share and cement its dominance in the long run. The battle of market domination is not going to be easy for the duo. It would be interesting to watch how each of the two would plan to keep the production unit busier than the other’s.
