Boeing (NYSE:BA) entered 2021 with a depleted order backlog for its troubled 737 MAX, after the long 737 MAX grounding and the COVID-19 pandemic drove a surge in order cancellations while causing order activity to grind to a halt. However, the aircraft manufacturing giant has been working hard to rebuild that backlog over the past six months.
On Tuesday, Boeing took another big step forward, winning a massive order from United Airlines (NASDAQ:UAL). That said, Boeing’s growing reliance on a few large orders from big airlines with a lot of bargaining power could weigh on the plane maker’s profitability in the years ahead.
United strikes again
During the depths of the pandemic, United Airlines deferred most of its aircraft orders to 2023 and beyond. Demand has recovered faster than expected, though, as COVID-19 vaccines have become readily available in the U.S. over the past few months.
As a result, United accelerated 45 737 MAX deliveries to 2022 and 2023 earlier this year. It also ordered an additional 25 737 MAX jets for delivery in 2023. That gave it 21 orders for 2021, 40 for 2022, and 54 for 2023 (plus another 73 to be delivered after 2023).
On Tuesday, United Airlines revealed a bold strategy to gain market share and improve the quality of its onboard experience by significantly expanding its domestic mainline fleet while retiring most of its single-class 50-seat jets. To carry out that strategy, the full-service airline ordered 50 737 MAX 8s and 150 737 MAX 10s from Boeing, along with 70 Airbus A321neos.
A boon for Boeing’s backlog
Following this week’s order, United Airlines has 380 outstanding orders for 737 MAX jets. That makes it Boeing’s biggest 737 MAX customer, surpassing Southwest Airlines (NYSE:LUV). All else equal, it will bring the total backlog for the 737 family to nearly 3,500 units, with United and Southwest each accounting for more than 10% of that figure.
Importantly, United Airlines wants a lot of jets in a hurry in order to execute its fleet strategy. It says 68 of the 737 MAX jets ordered this week will arrive in 2023, on top of the 54 deliveries already scheduled for that year (for a total of 122). That should give Boeing the confidence to ramp up 737 output to its unofficial late-2022 goal of 42 per month.
The delivery rate will slow after 2023. Still, United expects to take 205 737 MAX deliveries between 2024 and 2028, which will maintain its position as one of the biggest 737 MAX customers.
Weak pricing could pressure margins
Just between United Airlines and Southwest Airlines — which has ordered 134 737 MAX 7s year to date — two key customers have boosted their 737 MAX firm order books by more than 350 units in 2021. Furthermore, Ryanair hopes to place an order for at least 100 737 MAX 10s later this year, adding to the 200-plus 737 MAX jets it has on order today.
On the one hand, it’s good news for Boeing that customers are placing big 737 MAX orders. On the other hand, big customers tend to get bigger discounts. That’s especially true in the current environment, as Boeing has been fairly desperate to get sales rolling again for the 737 MAX.
For example, when Southwest recently added 34 737 MAX 7 orders for delivery in 2022, it raised its capital spending forecast by just $800 million — less than $24 million per plane. The 737 MAX 7’s most recent list price was $99.7 million.
Meanwhile, United Airlines’ new aircraft orders increased its capital spending commitments by a little over $12 billion. That works out to an average of perhaps $46 million per aircraft. United is almost certainly paying more for its A321neos than for its 737 MAX 10s, as it was a smaller order and Airbus is less desperate for new business right now. The 737 MAX 8s are even cheaper. All things considered, United is probably paying about a third of the list price for its Boeing order.
These deals will help Boeing keep its 737 factory busy for the next few years and give suppliers more confidence about future output. But selling a large proportion of its output at rock-bottom prices is likely to weigh heavily on Boeing’s margins and cash flow. To make a real recovery, Boeing will need to start winning orders from a broader base of customers.
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