Details of Irish carrier Ryanair’s latest contract with Boeing illustrate some of the negotiable areas within such agreements. Last month, the low-cost carrier completed its fourth 737-800 order in seven years under aggressive plans that predict fleet growth from 82 such aircraft to 225 by March 31, 2012. By then, Ryanair expects to carry 70 million passengers annually, compared with 34 million in the current year.
Like other low-cost carriers, the airline depends upon attracting passengers to occupy all available seats rather than providing capacity to match predicted demand. “Ryanair’s fares are designed to stimulate demand, particularly from travelers who might otherwise use alternative transport, or would not travel,” chairman David Bonderman told shareholders as he sought their approval–necessary because of the order’s relative size compared to that of the company.
His letter reveals how the mold-breaking airline has renegotiated orders at advantageous terms, reducing the effective aircraft price. It also obtained other concessions, including credits derived from earlier orders that can be applied to future business with Boeing. The airline’s desire to expand as cheaply as possible, and Boeing’s need to outbid the European Airbus A320 family has seen Ryanair take advantage of depressed economic conditions.
Taken at face value, the four orders– placed in 1998, 2002, 2003 and 2005–apparently cover almost 540 aircraft, but the reality is different. Some aircraft have to be counted twice to reach that total, and it now appears that Ryanair’s 2003 announcement overstated the case by almost 50 percent.
In 1998, Ryanair ordered 25 aircraft and took options on 20 more. Four years later, it agreed to acquire 100 (taking another 50 options), while in 2003 it signed for 125 (plus 78). This year, it announced orders for a further 70 (plus 70 options).
While this new contract deals with new equipment, the preceding order apparently included previously announced 2002 orders. In 2003 Ryanair and Boeing announced they agreed on a deal covering 100 new Boeing 737-800s less than a year after they announced record order of 150 737-800s.
So we could assume Ryanair placed “orders” for 150 aircraft in 2002 and an “additional” 100 in 2003, a total of 250? Well no, in fact. The second contract (which actually covered 125 units, according to Bonderman’s recent letter) included the previous year’s order for 100–not 150, since that figure included 50 options. After allowing for three 2002 options converted to firm orders, Ryanair ordered only 22 new aircraft in 2003.
Its option backlog at that time grew to 125, since Ryanair added 78 more units to the 47 outstanding 2002 options. Previously, Ryanair also benefited when 17 options taken in 1998 were allowed to lapse.
This year the airline successfully negotiated–or Boeing offered–delivery of 89 aircraft outstanding from 2003 at “the lower net price, under the 2005 contract,” said Bonderman.
Ryanair must pay the full original price for only 36 of 125 aircraft ordered in 2003. Compared with a nominal list price of $65.7 million, the airline will pay almost $51 million per aircraft, plus $900,000 for buyer-furnished equipment, subject to predelivery U.S. cost-escalation clauses.
Boeing has granted Ryanair “certain price concessions [in] the form of credit memoranda, which Ryanair may apply toward [Boeing] goods or services.” These credits also may be used toward 70-percent final payments for aircraft.
The latest deal provides for all Ryanair 737-800s to be fitted with winglets from Aviation Partners Boeing, which list for $725,000 (not including installation). The airframer also will provide improved support. Plus, Boeing and engine-provider CFM International have given “certain allowances” for promotional or other activity and will supply other goods and services on concessionary terms.
“The effective price of each aircraft will be significantly below the basic [$51 million] price,” said Bonderman. Had shareholders not approved, Ryanair would have lost $75,000 deposits on 70 aircraft.