One year ago, the airplane market was spooked by reports of "market tests" for Boeing 777 plane prices, when according to the CEO of Delta the company had acquired a used 777s for a paltry $8 million, a 97% discount from new Boeing 777-ER prices!
Prior to this report, in October, Delta CEO Dennis Muilenburg raised more eyebrows when he said there was a “huge bubble” in used widebody aircraft, and that as a result the market was “ripe” for Delta to buy used 777s, as he subsequently did for an unprecedented 97% price reduction.
CEO: I was wrong when I said used 777s were on market for $10M. It was actually $7.7M. We just signed a letter of intent to buy one.
— Delta News Hub (@DeltaNewsHub) December 17, 2015
Boeing's late December decision to cut production of its 777 long-haul jet due to a drop in demand, confirmed that behind the stable industry facade, the underlying economics are far worse than most suspect, and that prices were set to plunge absent implicit government subsidies. Furthermore, with the Ex-Im bank subsidizing Boeing's new plane purchases, it was next to impossible to obtain a clean "market test" for new Boeing airplanes.
Then, over the weekend, we got a glimpse into the real "price" of airplanes, when Iran said on Sunday it had negotiated to pay only about half the announced price for 80 new Boeing airliners in an order that Boeing had previously said was worth $16.6 billion. The sale includes 50 twin-jet, narrow-body 737 planes and 30 long-range, wide-body 777 aircraft. The first airplanes are scheduled for delivery in 2018, with the entire order being fulfilled over 10 years.
"Boeing has announced that its IranAir contract is worth $16.6 billion. However, considering the nature of our order and its choice possibilities, the purchase contract for 80 Boeing aircraft is worth about 50 percent of that amount," said Deputy Transport Minister Asghar Fakhrieh-Kashan, quoted by Iran's IRNA state news agency.
Then there is the question of how much funding the Ex-Im bank may have provided to Iran: when all is said and done, it is possible that the Persian nation ended up paying nothing out of pocket, and merely funded its purchase of Boeing airplanes with a generous loan from Uncle Sam.
As part of Iran's return to a post-sanctions world, Boeing and Airbus both signed huge contracts this month to supply airliners to Iran, the first such deals since international sanctions were lifted under a deal to curb Tehran's nuclear program.
Iran's recent return on good terms with the US has meant few have benefited as much as Boeing. as replacing the Middle-eastern nation's antiquated civil aviation fleet is one of the biggest economic opportunities of the 2015 accord to lift sanctions, negotiated President Barack Obama, who several years ago also imposed the same sanctions. Donald Trump has been a vocal critic of the pact, and his recent tweets have hardly benefited Boeing.
Even better news for Iran is that its need to replace its old planes comes at a time when Boeing, Airbus and smaller planemakers have all faced a downturn in orders, and are therefore expected to offer deep discounts, in this case roughly "half off" on new airplanes.
Meanwhile, Airbus's contract to sell 100 jets to IranAir, signed last Thursday, would be worth $18-$20 billion at list prices, but the head of IranAir has been quoted as saying the value of the contract would not exceed $10 billion, again suggesting that the demand for new airplanes across the world has collapsed if the world's two major aircraft producers are willing to offer half off terms to any marginal buyer.
The government of President Hassan Rouhani, a pragmatist, has pushed to finalize aircraft deals to show results from the nuclear accord with world power to end sanctions; the smart move also makes it unlikely that Trump will be able to undo the sanctions once financing commitments are in place with the Iranian nation, the proud host of brand new Boeing and Airbus planes. Ironically Rouhani faces criticism at home from hardliners over the cost of the purchases which could well be zero.
According to Reuters, Fakhrieh-Kashan also said on Sunday that IranAir may exercise an option to buy 20 more aircraft from ATR, a European maker of regional turboprops, in addition to a planned firm order of 20. A team from the planemaker would arrive in Tehran next week for final talks. "The final round of talks will be held with ATR representatives (next) week and we expect the IranAir contract to be signed ... in the following week," he told IRNA. "The purchase of 20 planes has been finalised and Iran may buy 20 more planes," said Fakhrieh-Kashan, adding that the contract for 20 planes was worth less than $500 million. It was not immediately clear if the sticker price for the order was $1 billion an higher.
Iran's orders aside, with global demand for airplanes - pardon the pun - crashing, it is not clear how this core component of exportable US Durable Goods, and US GDP, will fare in a year when the USD is already soaring and set to hit US exports significantly. One thing we do know, however, is that if and when GDP prints soft in the next quarter or two, the "economists" will just blame the weather as they always do, or perhaps just blame Trump.