Saudi Airline Picks A320 Over 737 MAX: Is Boeing In Trouble?

Aircraft giant The Boeing Company (NYSE:BA) recently lost a deal to its rival Airbus, after Saudi Arabian carrier Flyadeal made a commitment to buy 30 A320 Neo jets, with options to acquire another 20 jets. The latest declaration replaces Flyadeal’s $5.9 billion-agreement with Boeing for 50 737 Max 8 jets last December.

No doubt, this dealt another blow to Boeing’s commercial business that has been struggling for the past few months, following the twin crashes of 737 Max 8 jets that ultimately resulted in the grounding of this model in March.

Why Did Flyadeal Choose A320 Over 737 MAX?

Per Flyadeal, steady growth in passenger demand across domestic, regional and international routes primarily led to this latest decision. We believe that the fatal crashes and Boeing’s failure to bring back 737 Max in service over the past few months must have also impelled Flyadeal to take this drastic step.

Notably, the Saudi carrier has solely been an A320 operator. With an aim to rapidly expand its presence domestically as well as internationally, Flyadeal decided to buy 737 Max jets. Regarding the specifications of the two aircraft, it is imperative to mention that A320 neo can accommodate a maximum of 194 passengers, while maximum 210 passengers can seat in 737 Max 8. Moreover, 737 Max 8 jet flies approximately 50 nautical miles, which is significantly more than A320 Neo.

Naturally, adding 737 Max 8 to its portfolio was an appropriate strategic move by Flyadeal. But that was before the technical faults were detected. In June, the Federal Aviation Administration (FAA) discovered another potential safety issue associated with a microprocessor, failure of which can push the airplane's nose down during flight. This was a major disappointment, with Boeing working on software upgrades for months.

We believe this has been the final nail in the coffin, compelling Flyadeal to cancel Boeing’s 737 Max order and replace it with A320 Neo.

Is Boeing in Trouble?

Considering the current scenario, some might be skeptical about Boeing’s commercial business’ profitability in the near term. After all, 737 MAX has been the fastest-selling airplane in Boeing history.

In fact, the uncertainty surrounding the return of 737 MAX to the skies has also prompted other carriers to amend their orders. In April, Virgin Australia pushed back delivery of its first 737 Max jets by almost two years. Per media reports, PT Garuda Indonesia and VietJet Aviation JSC are reconsidering their 737 MAX orders in the aftermath of two fatal crashes.

Nevertheless, it is worth mentioning that in Paris Air show last month, British Airways owner IAG (LON:ICAG) announced its intention to purchase up to 200 Boeing 737 MAX jets. Considering the years of experience this aircraft developer possesses, we can expect Boeing to resolve the software glitch in this model over the next few months.

Meanwhile, Boeing and Embraer (NYSE:ERJ) entered into a joint venture (JV) worth $3.8 billion last year. This commercial aviation JV represents the biggest realignment in the global aerospace market in decades, further strengthening Boeing’s commercial business against Airbus and the emerging aerospace companies from China, Russia and Japan.

Following this JV, we may expect new commercial product line from Boeing and thus foresee a profitable future for its commercial business over the long run.

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Written By: Zacks Investment Research