Global credit rating agency Moody’s has said Boeing may have to necessarily look at further price cut on its wide body 777-300ERs, a view that could strengthen Qatar Airways’ bargaining strategy.
Moreover, Doha-based airlines’ letter of intent (LoI) with Boeing to buy narrow body 737 Max 8s also hinted that it may help seek price concessions from Airbus, Moody’s said in a report ‘Global Aerospace and Defense’.
Qatar Airways recently placed an order for 40 wide body aircraft (30 787-9s and 10 777-300ERs) valued at over $11bn and the deal also included a LoI to purchase up to 60 737 Max 8s. If all options are exercised, the deal would total almost $18bn at list prices.
“The 10 777s ordered will help bridge the production gap on that programme ahead of its transition to the forthcoming 777X variant around 2019, but we believe further rate cuts are still necessary over the next 2-3 years, given the subdued market appetite for the product of late in a persistently low oil price environment exacerbated by ongoing macroeconomic volatility,” it said, terming Qatar’s national carrier’s recent order with Boeing as credit “positive” for the US air-framer.
Although Qatar Airways order constitutes a nice win for Boeing, the large size of the deal, along with the inclusion of current generation equipment, the importance of the customer and a tight pricing environment, collectively imply a high likelihood of very aggressive price discounting from Boeing to secure the deal, Moody’s said.
Amidst “challenging” pricing environment on multiple fronts; Qatar had added leverage in that Boeing (like Airbus) received only limited net new orders for wide body equipment this year, it said.
If Boeing is able to secure firm orders for its 737s, this would be even more noteworthy, as Qatar Airways does not currently operate any Boeing narrow bodies, instead opting for an all-Airbus fleet of single-aisle aircraft to date, the rating agency said.
Such a development, according to Moody’s, would be credit “negative” for Airbus, with an important customer diversifying and ever more clearly evidencing its discontent with the European air-framer for its inability to deliver newly outfitted A320neos as per the previously committed delivery schedules.
Airbus currently has 30 A320neos and 16 A321neos in backlog from a previously booked Qatar Airways order. However, contract execution and performance issues arose from Pratt and Whitney’s engine that adversely impacted Airbus’ ability to make timely deliveries of the aircraft.
Similar supply-chain issues have caused delays in Airbus A350 wide bodies’ delivery, inviting the displeasure of Qatar Airways, it said; adding “we believe this likely influenced the carrier’s (Qatar Airways) follow-on order for the 787s.”
Moreover, if Qatar Airways acts on its LoI for Boeing narrow bodies (“a big if”), Moody’s said Airbus runs the risk that Qatar Airways cancels its remaining order for 46 Airbus narrow bodies (four have already been cancelled).
“From our perspective, the LoI for Boeing narrow bodies looks like a not-so-subtle warning to all interested parties about the growing amount of options available to aerospace customers, in both the civil and defence markets,” it said.
Boeing’s 737s are a direct competitor to the A320s of Airbus. The next generation Max variant from Boeing is behind the competing new engine option (neo) variant from Airbus and is not yet available for delivery.
“Qatar Airways is a significant customer for both manufacturers and will continue to press both companies for price concessions, including potentially on existing orders in consideration of forestalled cancellations,” it said, adding hence the notion that the Boeing LoI may just be posturing to impose more leverage for potential price concessions from Airbus, or even an outright cancellation of orders without offsetting replacement.