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StockBeat: IAG's Rescue Act for the 737 MAX Goes Down Badly

Published 06/19/2019, 04:48 AM
Updated 06/19/2019, 04:48 AM
© Reuters.

© Reuters.

By Geoffrey Smith

Investing.com -- International Airlines Group (LON:ICAG) has ridden to the rescue of Boeing (NYSE:BA) – but the market doesn’t like it.

Shares in the parent group of British Airways, Iberia and Vueling are at the bottom of both the U.K. Spanish benchmark indexes after early trading on Wednesday, after it signed a letter of intent to buy 200 Boeing 737 MAX aircraft, including the 737-8 model involved in two fatal crashes over the last year.

The vote of confidence in Boeing’s erstwhile cash-cow, which has been grounded worldwide since March, had triggered a sharp relief rally in Boeing stock late on Tuesday, sending it up over 5% to its highest in over a month.

But at 04:30 AM ET (0830 GMT), IAG’s shares were down 4.5% in London and 4.6% in Madrid, while the U.K. FTSE was down 0.3% and the Ibex 35 was down 0.5%. The benchmark Euro Stoxx 600 was down 1.5 points, or 0.4% at 383.68, consolidating after the heady rally triggered on Tuesday by European Central Bank President Mario Draghi.

The size of the deal, and Boeing’s obvious need for some good publicity to revive moribund sales, both suggest that IAG will get the planes at a steep discount to Boeing’s list price, although the company’s brief press statement gives nothing away on that score.

But if the company is getting such a good deal, why is the stock down? The risk of putting money down for a plane that’s not allowed to fly seems small, given that the delivery schedule is between 2023 and 2027. That surely gives Boeing more than enough time to satisfy even the most safety-conscious regulator and airline. (It’s worth noting that the order is also split between the 737-8 and the 737-10 model, which has had no notable safety issues.)

Moreover, all that has been signed is a letter of intent that is, as the statement says “subject to formal agreement.” It is not clear that IAG has actually committed any money at all at this stage, or would ever need to if some of the doom scenarios feared for the 737 MAX materialize.

Of more concern is perhaps the radical shift away from Airbus, its favored supplier in recent years, especially for short-haul operations, with all the operational risks that that entails.

But the sheer scale of the order is arguably perhaps the biggest reason for the stock’s decline. The upper limit would represent over one-third of IAG’s existing fleet. While some planes would obviously replace retiring ones, the order appears to prepare the way for yet another capacity expansion in a European market which already awash in planes. HSBC analysts issued a note earlier Wednesday saying that more airlines were likely to follow Deutsche Lufthansa (DE:LHAG) and issue profit warnings as a result of falling demand, which depressed prices across the sector in early trading.

The order has one other intriguing angle. In increasing his options, IAG CEO Willie Walsh has made clear he won’t ever need to buy rival Norwegian Air Shuttle (OL:NWC) to satisfy his growth ambitions. That removes another prop for the battered discounter’s share price, which hit an eight-year low last week. Walsh has recently played down any suggestion of reviving his interest in taking over Norwegian, but the fact remains that, indirectly, the order has increased the chance that IAG can buy up its young fleet at a distressed price in the future - at which point he may feel able to let his own Boeing order lapse quietly.

(This article has been updated to include the detail of HSBC's research note.)

Latest comments

It is not just a technical matter that will be, at some point, resolved. Was a chain of events, decisions, protocols, company values that underestimated safety. And if an aircraft manufacture takes safety lightly, passengers, investors and carriers should avoid this manufacturer altogether. IAG played Russian roulette.
Awesome deal boeong
Plus, the regulatory tests currently underway will confirm the new engine mount design is flawed. Aircraft designed unstable!!How long to redesign the engine mounts and retrofit? 18 months???
Very dangerous game by IAG. Consumers are already avoiding flying 737Max and 787 (battery fires), and customers will move to Lufthansa (all Airbus)
The Dreamliner is an amazing plane, and no one is avoiding it. That's a goofy statement. When Boeing finishes the software/hardware fixes on the Max, it's going to be the workhorse of the industry for the next 50 years just as the previous 737 has been. After so much attention, it will likely be one of the safest planes in the air once returning. I'll fly it, no question.
 I think your comment might be a bit emotional (we are humans after all). We, I presume, are all investors here. so taking aside any emotion, it is a risky move from IAG. and people perception of Boeing Aircraft will depend of many factors. Will depend a lot of Boeing strategy  Let see what happens.
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