Ryanair Holdings Plc (RYA) may buy as many as 200 of Boeing Co. (BA:US)’s newest narrow-body jet, the 737 Max, later this year after placing a record-setting order for the model that’s being phased out.
Ryanair’s commitment to buy 175 of the existing 737-800 models, with a catalog value of $15.6 billion, is Boeing’s biggest European sale and will let the Dublin-based carrier add discount flights in markets vacated by full-service rivals. Ryanair may become a “lead customer” for the re-engined Max, with an order of 100 to 200 by year-end, Chief Executive Officer Michael O’Leary said.
“Today’s order is very much an interim order and a forerunner for what I very much hope will be an order for Max aircraft once our teams finish their study,” O’Leary said at a press conference in New York with Boeing Commercial Airplanes President Ray Conner. “We both hope the joint team we’ve established will report back and come up with a deal for a Max order sometime before the end of this calendar year.”
A Max order may help Boeing catch up to Airbus SAS’s new A320neo, which has outsold its rival and is set to enter service two years earlier. Airbus’s sales success makes it unlikely for Ryanair to get the discount it would want to buy the plane, O’Leary told analysts.
Europe’s biggest low-cost carrier last placed a major order in 2005 and has been contemplating a new deal for more than three years with deliveries from Boeing having ended in December. The carrier got a heavy discount on the last purchase and the new accord has similar terms, with “slightly higher prices,” O’Leary said.
Airbus Chief Operating Officer John Leahy spoke last week of an ongoing price war between the two planemakers, though Conner told investors March 4 that the aggressive pricing pressure to get initial Max orders had subsided. He also said Chicago-based Boeing would “be OK” on the so-called bridge pricing on the final orders for the current model.
Ryanair rose 4.8 percent to 6.08 euros in Dublin. Boeing advanced 0.4 percent to $85.51 at the close in New York.
The new jets, scheduled for delivery between late 2014 and 2018, will permit 5 percent annual growth and take passenger numbers above 100 million from 79 million in 2012, Ryanair said. A Max order would address expansion through 2019.
“This puts Ryanair back on a growth track which they were at risk of not seeing,” said Donal O’Neill, an analyst at Goodbody Stockbrokers with a buy rating on the stock.
O’Leary said the past year or so has seen a “significant uptick” in growth opportunities, with the failure of Spanair SA and Hungary’s Malev Zrt. plus job cuts at carriers spanning SAS AB of Scandinavia, the Iberia unit of International Consolidated Airlines Group SA (IAG) and discount rival Air Berlin Plc. (AB1)
“We needed this order to fill the gaps left by the likes of Iberia in Spain and SAS in Scandinavia as the network airlines concentrate on long-haul and feeder services,” he said in an interview.
Some 75 of the new planes will replace older ones, with the rest adding capacity, taking the total toward 400 aircraft, all of them 737-800s. The fleet might grow to more than 500 jetliners with a follow-on order that could reach a list price of more than $20 billion.
Ryanair had said it was also considering Airbus A320 planes, which have nine fewer seats, as well as the C919 from Commercial Aircraft Corp. of China, a new entrant to the single- aisle market. Another option was to grab jet orders from rivals struggling to fund purchases, though secondhand prices are high, making that option unattractive, O’Leary said.
The fleet deal will be funded from cash flow and debt, with some aircraft sold under so-called sale-and-leaseback arrangements. With capital outlays increasing this year and next, the Irish airline will hold off on further share repurchases and special dividends until 2015, it said.
Today’s order, Boeing’s largest this year, comes after Airbus won commitments for more than 400 A320 aircraft in the past week from Deutsche Lufthansa AG (LHA), Turkish Airlines (THYAO) and Lion Mentari Airlines PT of Indonesia.
The Ryanair contract helps fill up remaining delivery positions at Boeing as the U.S. manufacturer seeks to smooth the production transition from the current 737 to the Max model.
“We didn’t have a lot of open slots anyway, but this pretty much closes the gap we did have,” Boeing’s Conner said. “We have a few more left over, but not that much.”
The team evaluating the Max is probing several issues including whether buying the heavier model makes sense, since it will incur higher airport landing charges, O’Leary said.
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