On 9 May Ryanair announced it had placed an order of up to 300 737-Max airplanes with Boeing. Before the deal Boeing had reported firm orders for more than 3,500 737-Max planes, as at the end of Q1.
It delivered fewer than 400 during the entirety of 2022. Following the announcement, Boeing bonds outperformed the investment grade corporate market by 5-6 basis points; its equity outperformed the S&P 500 by about 2.5%, and its nearest peer Airbus by about 2.25%, from 8 May until 11 May.
Are the market moves a rational reaction to the news? At this point in time, yes. Boeing already has an enormous backlog to deal with. It is struggling to keep up with demand and Ryanair’s order won’t convert to revenue for years to come.
The order, however, has multiple benefits for Boeing. Equity markets should see it as affirmation that Boeing is not losing all its market share to Airbus and its future certainly looks brighter than it seemed pre- announcement. Bond markets, meanwhile, should see this as an increase in the firm’s asset base – future revenue is an asset and could support liquidity if it is ever required. The orders will eventually convert to cash and enhance Boeing’s ability to reduce leverage. This is good news for bondholders.
Orders turn into revenue over time – in this case when the aircraft are delivered to the customer. Of course, 737-Max’s are complex machines, and the planes aren’t expected to land with Ryanair until 2027. That is some way off but does allow Boeing to plan production, which is important for any manufacturer, particularly one of large ticket items dependent on complex supply chains. Eventually, however, Boeing will report higher revenue because of this order.
Cash typically comes at the outset of the order and then in several lump sums throughout the order’s life. This is subject to negotiation and although the exact details are hard to accurately gauge, we can be sure it is cashflow positive for Boeing.
A place in the order book has value
When order books are as full as they are now, they become an asset for airline customers too. There is an ecosystem of airlines, airplane leasing companies, air-framers like Boeing, and the suppliers to the air-framers. As order books grow relative to production rates, it supports the planning of the air-framers and their suppliers. Scarcity relative to demand helps leasing companies and orders already made become more valuable to the customer as waiting times grow.
Think about when you order a car. If the car was available in two to three weeks, the order would have a particular value. If the car was so popular that it would only be received in two years’ time, one would expect that order to become more valuable to the customer. And if there were only two car companies and the wait for a new car was several years at each of those companies, that’s akin to the situation now for buyers of commercial airplanes. As a result, the likes of Ryanair will be very reluctant to give up their spot in the queue and have a real source of value in that order.
Positive accounting impact: it shouldn’t matter, but it probably will…
Lastly, there is an accounting benefit to Boeing if it increases the defined production lot. If Boeing expects to produce more planes, it will decrease the per-unit accounting cost and increase the reported margin. Financial markets do seem to react to accounting measures, regardless of how many times people are reminded that, at the end of the day, cash is king.
The large order from Ryanair was good news in many ways and, along with the quarterly commentary from an array of firms involved in engines, aviation electronics and the airframers like Boeing, it provides fundamental support for the commercial aviation sector. We continue to see select opportunities here.
