Both orders were seen as blows to Bombardier and Embraer . Bombardier competed aggressively for the order to place its C Series into the airline and build on the order announced in February from Air Canada for up to 75 CS300s. Embraer, an incumbent at United with a large fleet of E-175 E1 jets serving regional routes, had been confident of landing an order for the new E2 next generation airplane.
Boeing smoked both competitors.
Why would United buy 65 end-of-production 737-700s instead of the more modern C Series and EJet E2?
There are several reasons, but fundamentally it comes down to price. Boeing offered the -700, an airplane from a fully amortized production line, for a price reported in the market to be about $22 million. This is well below what either Bombardier or Embraer could offer for their airplanes.
But that’s not all.
Concessions for United
According to my market intelligence, Boeing also stepped up to offer some additional concessions on previous transactions. And, although not particularly well noticed, UAL swapped some 787-8 orders for the 777-300ER and the 787-9.
Boeing hoped to gain 10-13 more -300ER orders from United to help fill the bridge between the 777 Classic and its successor, the 777X, which enters service in 2020. UAL only bit for four -300ERs.
Boeing, after years of denying it would do so, finally announced in January a production rate reduction in 2017 from 8.3 777s per month to seven. Many believe Boeing will have to further cut the 777s rate.
The ability of Boeing to offer United 65 737-700s for delivery between 2017 and 2019, when the current 737 model is slated to end production in favor of the 737 MAX, suggests the bridge between the 737NG and the 737 MAX is not as solid as Boeing has been claiming.
According to Wells Fargo, United in the fourth quarter wrote a check to Boeing for $345 million in accelerated “advances” or deposits for aircraft as part of Boeing’s cash flow to fund shareholder dividends and stock buy backs. This was also a factor in the -700 deals, according to market information.
Neither Boeing nor United discuss commercial terms for their deals.
Blocking and tackling
A big motivation for Boeing to do the 737-700 deal with all the concessions was to block Bombardier from getting its C Series into United. The EJet was less of a concern, and Embraer officials think they were collateral damage.
Bombardier’s CS100, a 110 seat airplane, is slightly smaller than the 737-700 at 118-126 passengers in UAL’s configuration. But the CS300 is smack up against the -700 in size. Except for 35 Airbus A350-1000s, United is exclusively a Boeing customer in its mainline operations.
(Legacy United management ordered a large number of Airbus A320s, but United’s current Continental Airlines-dominated management has remained loyal to Boeing.) Bombardier’s C Series challenged this exclusivity and Boeing decided to block and tackle any Bombardier entry into United.
With today’s low fuel prices, coupled with a very low capital cost for the -700, Bombardier’s advantages for the more fuel efficient C Series wasn’t enough to carry the day in a straight-up competition between the airplanes. Add in the larger deals for the 777, concessions by Boeing on other existing orders with United and the accelerated cash advances, Bombardier didn’t have a chance. (Neither did Embraer.)
(Scott Hamilton - Forbes)