Ryanair hustle lands $22bn 200 Boeing deal

Imagine this scenario. Boeing designs an all new aeroplane that can travel faster, higher and longer. The leader of a major airline approaches the manufacturer and says the design is suboptimal for his needs.

He hustles Boeing, which ultimately delivers a different machine and the major airline orders enough to kick-start a huge success for the manufacturer.

The year is 1955. The airline chief executive is the iconoclastic Juan Trippe who led the then largest and most prestigious carrier in the world, Pan American. He was known for an aggressive risk-taking style that drove his employees hard in pursuit of success. The aircraft was the Boeing 707, which went on to be a bestseller among global airlines, including Aer Lingus.

On Monday last, in a hotel in Manhattan, history repeated itself. The head of Boeing Commercial Airplanes Ray Conner announced that Ryanair was ordering 200 Boeing MAX aircraft with a sticker price of no less than $22bn, the single largest industrial order by any Irish company in the history of the State.

Boeing invented the MAX in 2011. It was designed to bring faster, larger, longer attributes to the best selling 737. All new engines were key to the 15% or more cost savings that MAX could deliver for an airline. Aerodynamic changes too were central to driving costs down. Boeing imagined Ryanair, its single largest customer for the -800 version of the 737, would be its launch customer. It was disappointed.

The Ryanair team saw the immediate benefits of all new engines but wanted more seat capacity to justify the higher price for MAX. Before Ryanair ordered its first 189-seat 737-800 in 2003 the conventional wisdom in the short-haul industry was that a 149-seat aircraft, utilised by the low-cost pioneer Southwest, was optimal. Ryanair blew that idea up and helped shape the -800 version, which has since become Boeing’s best selling variant of the 737.

Now it was pushing Boeing again. Under EU regulations, an aircraft has to add an extra cabin crew member if seat numbers exceed 200. By keeping the number under 200, Ryanair can take its per seat unit costs down by about 10% with MAX by combining engineering advances with fixed labour resources on each flight.

That comes from adding eight seats and strapping two CFM LEAP engines to each plane. Hence, the hustle for a MAX with up to 200 seats.

For over two years Boeing worked on this challenge after early resistance. It announced the engineering breakthrough at the 2014 Farnborough Air Show. The last piece of the jigsaw for Ryanair was price. It wanted a large discount to buy 200 aircraft.

Actual prices paid by airlines in large orders are less well known than the Third Secret of Fatima. The list price for these 200 MAX aircraft (100 ordered firm and 100 options) is $22bn, but I’d guess Ryanair is paying less than half of that. Such a discount, coupled with the unit cost effects of MAX, will lower Ryanair’s industry leading unit costs even further from 2019 onwards.

That provides the ammunition to engage in more extensive price wars across the European short-haul air travel market.

One note of caution. Pan American bestrode everything it surveyed in the early 1970s. It had a powerful business model and a swashbuckling chief. Yet it collapsed amid a wild period of diversifying into many travel related activities.

Ryanair has studied all of that. This helps explains why it retains what many consider an overly conservative amount of cash in reserve. It explains too why the business stays focussed on what it does best — short-haul air travel.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.