It didn't come as much of a shock last week when President Donald Trump pulled the plug on a 2015 agreement that eased economic sanctions on Iran in exchange for limits on Iran's nuclear enrichment program. After all, Trump had long characterized the agreement as a "bad deal".
The reimposition of U.S. sanctions throws a wrench into the plans of companies that had started doing business with Iran. Aerospace is one sector that will be hit particularly hard, as Iranian airlines had been desperate to upgrade and expand their fleets. However, the U.S. withdrawal from the Iran deal will hurt Airbus (NASDAQOTH: EADSY) a lot more than Boeing (NYSE: BA).
Boeing hasn't been counting on Iran
Two years ago, with the pace of aircraft orders slowing, Airbus and Boeing were eager to line up orders from Iranian airlines. Both companies signed big deals with Iran Air during 2016. Agreements with smaller Iranian airlines followed.
The deal that Boeing eventually struck with Iran Air called for the carrier to buy 80 aircraft, consisting of 50 737 MAX 8s, 15 777-300ERs, and 15 777-9s. In 2017, Iran Aseman Airlines signed a letter of intent for 30 737 MAX planes, bringing Boeing's total orders from Iran to 110 aircraft. However, Boeing never received licenses from the U.S. government that would allow it to export aircraft to Iran, and so it never included these deals in its firm order book.
Boeing doesn't need orders from Iran for the popular 737 family, which had 4,673 firm orders as of the end of April. (That's equivalent to roughly seven years of production.)
The potential 777 orders from Iran Air were far more valuable. Nevertheless, Boeing has been able to sell out its delivery slots for the next couple of years without relying on deliveries to Iran Air. Just last week, Boeing sold another four current-generation 777s to Lufthansa Group.
Airbus has a much bigger problem on its hands
Like Boeing, Airbus doesn't need the narrowbody orders it received from Iran. Indeed, the A320 family has an even bigger backlog than Boeing's 737 family. However, Airbus is in a much more precarious situation with respect to widebodies.
Iran Air ordered more than 50 widebodies from Airbus, all of which were included in the plane maker's firm order book. The carrier currently has outstanding orders for eight A330-200s, 28 A330-900neos, and 16 A350-1000s -- all of which will have to be canceled because Airbus planes use a high volume of American-made components.
Airbus can afford to lose the A350 orders, as that model has a substantial backlog. The same can't be said for the A330. Airbus only has one A330 order year to date, which has been offset by six cancellations. As a result, the company announced last month that it would cut A330 production to around 50 units in 2019, down from 60 this year.
Losing the 36 Iran Air orders will make this bad situation worse. The backlog for current-generation A330s will fall to 78 from 86 at the end of April, while the A330neo order book will fall from 214 units to just 186. More than a third of those remaining A330neo orders are for AirAsia X, which has been waffling on its long-term fleet plans, and another third are for aircraft lessors, which typically prefer to buy the most popular aircraft models. Thus, it is becoming more and more urgent for Airbus to shore up the A330 order book with new deals.
A missed opportunity versus a potential crisis
For Boeing, the U.S. withdrawal from the Iran nuclear deal represents a missed opportunity. If Boeing had been able to go ahead with its planned aircraft sales to Iran, it wouldn't have needed to cut 777 production as much as it has in the past year -- and it may have been able to ramp up output faster after the 777X introduction in 2020. However, the loss of this opportunity won't impact Boeing's results much relative to the status quo.
By contrast, Airbus desperately needed the A330 orders it had received from Iran Air. Without them, Airbus may be forced to offer even deeper discounts to rebuild its A330 order backlog and avoid further production cuts.
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