IAG CEO Explains 737 MAX Order

Filed Under: Aer Lingus, British Airways

In mid-June at the Paris Air Show, IAG (the parent company of British Airways, Iberia, Aer Lingus, and Vueling) expressed interest in a surprising aircraft. The company signed a letter of intent to acquire 200 Boeing 737 MAXs, valued at $24 billion at list prices.

This caught many of us off guard:

So, what was IAG’s motivation for signing this LOI, according to CEO Willie Walsh? He says that this order was motivated by frustration with Airbus:

  • IAG has experienced an average of 70 day delays on their new A320neos, which has left the company frustrated
  • IAG wants to have a mixed narrow body fleet, so that they’re not entirely reliant on one manufacturer; I suppose that’s fair enough, when you look at what’s happening with the 737 MAX right now

Walsh says that this “should be an indication not just to Airbus but to everybody that we’re unhappy with their performance. I know everybody interprets it as an issue of price, it’s not.”

Airbus has indicated that they’d like the opportunity to compete for IAG’s business, though Walsh has stated that he’s not interested in pursuing that.

Personally I remain skeptical for now.

With all due respect to Mr. Walsh, him saying that something isn’t about price isn’t especially believable. I have a lot of respect for the guy, and part of the reason he’s so successful is because he is always concerned about price. Always.

He’s as concerned with price as American mechanics are concerned about no American plane taking off without every little thing fixed, regardless of whether it needs to be or not.

While the optics of this deal look bad, in my opinion, this was ultimately probably a smart strategy on IAG’s part:

  • IAG hasn’t actually committed to anything, as they’ve only signed an LOI and haven’t finalized their order
  • If they do finalize their 737 MAX order, I’m sure they’re getting a heck of a deal from Boeing
  • If they do decide to go with the A320neo, you can bet they’d get a great deal from Airbus as well

So whether Walsh will admit that this is about price or not, there’s no doubt that IAG will get the best price imaginable on whatever narrow body fleet renewal they plan going forward…

Comments
  1. I don’t think you fully understand what’s going on here.

    Think of it this way. If you run a brokerage firm, you buy a back-up generator. It’s not about price. You have to have an alternative if the power goes out (since not executing clients’ trades isn’t an option). So you pay whatever a back-up generator costs.

    Sure, you try to get the best price you can (as you said) but, again, that’s not what’s driving anything here.

    Sometimes you just gotta have options, an alternative. And price be damned.

  2. “and part of the reason he’s so successful is because he is always concerned about price. Always.” can you elaborate on the statement?

    Personally I don’t care what anyone else says. This is a leverage to sweeten trade talks for post-Brexit UK

  3. @Tom: I have to disagree with you for the most part. You and lucky are right that diversifying actually makes a lot of sense for IAG if you consider their route network and how a simple issue like the 737MAX or the Dreamliner engine issues can take a toll on an airline. However, we are talking about a LOI of 200 narrow body aircrafts. Their current narrow body fleet includes a little over 400 in total. You are not buying a back up generator, you‘re buying a couple power plants here and I have to agree with Lucky that this was absolutely about the price. Does it make sense if you don‘t factor in the price? Yes, to a certain extent. However, if you get a fantastic price (which I am sure Boeing was willing to give them) then it is a no brainer.

  4. I actually work in the same building very close to many of the sales and marketing folks, so can share some insight on what I’ve been hearing around the office:

    -the VP of Sales and Marketing hinted in a recent meeting that IAG got a VERY good deal from Boeing for the MAX’s
    -the quantity and timing of Walsh’s order was a big surprise even for many of the folks who worked closely on his campaign
    -part of his decision had to do with the relationship and trust he’s built with Boeing, and wanting to help rebuild during a difficult time (perhaps implicitly some of the publicity exchange you’ve been talking about)
    -there may or may not be clauses in the LOI that allows IAG to essentially do whatever they want (I.e. swap, deferr, cancel etc.)
    -Willie Walsh is also a 737 pilot (not that it should’ve made a big difference)

  5. “AG has experienced an average of 70 day delays on their new A320neos, which has left the company frustrated.”

    Every airline that ordered the A320/321 Neo has experienced significant delivery delays. Is there any ‘new’ or newish jet like the Max/Neo/Dreamliner/A350-XWB that was delivered right on time? No! 70days is just abit over 2months and that really isn’t such a big delay. So that point doesn’t make sense.

    WW is just buying leverage for his next order. He didn’t get the A380 for BA at the throw away price he wanted so he’s trying the best he can to get a better deal from Airbus.

  6. Exactly what was wrong about the optics or anything else with this deal? Even if willie Walsh took advantage of the tough position Boeing is in right now (of course he did), that’s his job. He’s probably done great for IAG.
    Your repeated optics comments sound idiotic (I love nearly everything else about your blog). By your logic Airbus shouldn’t be out there trying to screw Boeing out of 737 orders now either because of optics. How does the flyadeal deal pass your optics test. I could argue that they are taking advantage of two really tragic crashes to smack their competitor when they are down. Come on.

  7. You don’t have to say you respect him. The man has gutted an airline that was previously a national treasure and has achieved the impossible of turning British nationals against their own airline.

    Amongst us consultants, he’s just a running joke who will one day be a case study on how *not* to run an airline.

  8. Also, do we know what Airbuses track record is for delivering on time? If I promise a great price, but never deluver on my dates, I’ll f-up your operations. In that situation does a cheaper price matter?!

  9. When a CEO tries to emphasize that it’s not about the money… it’s about the money.

  10. HChris: Ok, a back-up generator might’ve been 50 planes but, as you point out, they ordered 200. Apparently, they REALLY want to put a cattle prod to Airbus. But still. 200 is very big number, even for IAG.

    In my experience over the years, often when there’s something like this, it turns out that there are behind-the-scenes political considerations (and here I mean inter-corporate politics) involved, i.e., people are already thinking about setting up the next deal down the road — but that’s just a wild guess on my part.

  11. I agree this deal was about price but not necessarily the price of the 737 Max. It is in the interest of all airlines to keep Boeing viable as a counter to Airbus. If Airbus becomes the only viable major manufacturer, the price of all Airbus planes will increase substantially. Without government subsidies total failure of the Max program might be an existential threat for Boeing’s civil airline division. At least that could be a possibility.

  12. There is a lot of metal sitting around Renton Wa these days with the question how many will they actually deliver to their original customers? That leaves a huge discount considering Boeing has already written a lot of them. And they need to plug a huge hole especially with the huge cancellation with the Saudi’s.

    Then one has to take in consideration how long it will take the flying public to get over the Max issues, that will take a long time. If Boeing does not get this bird flying by end of the year it’s all over with, customers are going to go elsewhere and frankly they ( Boeing) will deserve that. And I am ex USAF and was a huge fan of Boeing metal. Hell look how long it took them to get the tanker flying and that was with an airframe that works!

  13. Probably a good time to sign up for the Max. Demand is low and price is dropping.
    Soon (in a year or two), the max issue will be forgotten/forgiven by the passengers, although some ssy they will never fly Max. Well, guarantee they will…
    The max will be as common as the 737NG is today. The last NG ever to be produced is already delivered, so the max is the future.

  14. “I don’t think you fully understand what’s going on here.”

    That’s the norm… Lucky is a great writer, businessman and motivated traveller, but his analysis of the airline industry has always been suspect. Which isn’t a problem because he’s never claimed to be an expert, but I think many people seem to conflate spending a long time on a plane/being good at booking flights as being synonymous with being an airline economist/analyst – they’re very different things.

    Oscar – The British public aren’t obsessed with “national treasures”, so I don’t buy that comment at all. In fact, all the stats I’ve seen that try and track this kind of thing show it being pretty steady throughout his tenure, generally only falling during major incidents like the data breach. The claim that people “hate” the airline is somewhat nonsensical given they carry a record number of passengers almost every year…

  15. A Letter of Intent is NOT an order.

    You even say so in the text but still put up (yet again) a misleading post title.

    And do you really think IAG are going to order a plane that still has significant unresolved issues? I don’t think so and Airbus knows that. And Walsh knows that as well. IAG is never going to get a MAX in it’s fleet.

  16. @ Oscar

    I do wish you’d tell us which consultancy you work for, so I can avoid such half-arsed analysis.

    Maggie Smith and Judi Dench and Alan Bennett are national treasures (as was the late, lamented Victoria Wood).

    British Airways is not — and nor has it been at any time in my life (and I’m an oooold man). Past scandals are too numerous to list, but include Dirty Tricks, Laker, and sealing-up “redundant” emergency exits.

    But financially it is undoubtedly a success. Unlike the US3, to take one example, it has never had to go through a bankruptcy.

    Just think of BA as a machine designed to make money, which they mostly do by flying people and stuff around the planet. The MAX LOI is just a tiny part of that game.

  17. That vague plan for a deal is for Willie Walsh the equivalent of Akbar al Baker announcing he is leaving Oneworld. It means nothing

  18. So 70 days waiting is a problem BUT two big crashes and new issues discovered everyday on the grounded MAX are not.

    Please.

  19. “…we do not want to rely on one aircraft type… ” Sure enough the option he goes to is a grounded suicidal aircraft. Not an honest statement from the CEO.

  20. I think he’s just trying to get Airbus to give him a ludicrous discount by pretending to jump into bed with Boeing. The problem with this max order is that the price (which is without a doubt Walsh’s main interest) can’t outweigh the cost of retraining thousands of IAG staff to be able to fly the max.

    Also if any of these planes go to BA the British tabloids will tear them to shreds. Just picture the headline in the Sun newspaper. “British Airways buys Boeing planes that crashed: could you be at risk?”

  21. “Just picture the headline in the Sun newspaper. “British Airways buys Boeing planes that crashed: could you be at risk?”

    Almost every aircraft type out there has crashed. The only exceptions I can think of are the newest planes: A380, A350, 787 and that is because fewer of them have been flying for less time.

  22. Whatever happened to your visit to the Balkans (Macedonia, Croatia, and Slovenia)? Will there be a trip report about that? Also, the trip report to Dubai & Beirut…

  23. @John

    Agree and disagree. Boeing has been kicking Airbus’s tail in the widebody marketplace for a long time (forever, really) and Airbus really the same in the narrowbody market in the last decade+. This is not the seismic shift that it would’ve been if it were an Airbus narrowbody or Boeing widebody that were having issues.

  24. This really makes you question the competency of IAG leadership to make such a marketing blunder. They are telling their customers they do not care about their safety. Such incompetence I could never invest in much less fly on.

  25. Oh dear.
    These days there are far too many armchair experts on this site making idiotic comments when it’s painfully obvious that they obviously have no clue about the airline industry…..

  26. @tom

    You’re clearly not from the UK. The tabloids are well known for publishing rubbish. So this would be a gold mine to them. They don’t care about what the story is. If they can use it to gain interest then they’re going to publish it. Just they’ll use their regular scaremongering to whip much of the British public into a frenzy about these planes. So please know that I’m not being particularly serious I’m just saying what I expect will happen, should this deal go through.

  27. Why not try the Embraer 195 E-2? While it can only hold 110-130 pax, there might be more flexibility to move it around to lower demand routes. Has a range of 2,600 nmi, which should be more than enough for intra-Europe flights and even a few flights to North Africa. Are there major issues with Embraer’s production? Just seems like a decent alternative.

  28. The 737 MAX scandal is one of aviation’s great dirty coverups. Boeing has consistently LIED. It’s president gave a pathetic defense of the company and himself. People have NEEDLESSLY died. I do NOT trust this company. Why reward this behavior with a massive order of a product that is not safe? BOEING killed these people.

  29. Oh dear, Wee Willie is sore.

    I suspect it’s because Airbus wouldn’t sell him the A380s he wanted at a knock down price and now he’s throwing his toys out of his cot. He has a long history of behaving like a spoilt child.

    BA is already on a nosedive in terms of popularity in Europe between the whole operation being closed down for four days apparently because someone flicked the wrong swich and the huge data breaches that they claim were not their fault and it was those awful hackers and they are foot stamping about the fine so the 7M8 will only help them consolidate that position as the world’s most hated airline because in spite of the horrors they have caused for their customers and frequent fliers, not one head has rolled.

  30. One has to wonder if the NEO is missing operating cost targets. It is pretty well known that the MAX was performing extremely well from a performance and cost perspective, leaving out the grounding.

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