When the Wizz IPO plans were announced a few weeks ago you will recall that we questioned the timing and the overall plan of listing a Hungarian airline in London right now when just about every IPO is failing to gain good support, and when the core business of Wizz is under threat from economic instability and rising costs.
If Wizz had continued with its planed IPO timeline then it is highly likely that the whole thing would have become an embarrassing failure with significant negative PR fallout. All this of course came before the recent share dives for Lufthansa and Aer Lingus on the back of profit warnings last week and the Iraq situation, which put a drag on almost all airline shares across Europe, the USA and beyond.
So well done to Wizz and the advisors involved for doing the right thing at speed in the face of insurmountable obstacles. The Wizz Air statement cited current market volatility in the airline sector. Wizz was seeking to raise €200 million to strengthen its balance sheet and in so doing fund fleet growth, something it is now going to have to either put on hold, re-think or come to the door of the lessors for.
Meanwhile, the end of last week saw China Eastern Airlines agree to purchase 80 737s, in a mix of 800s and MAX aircraft. When the deal is completed it will be the largest ever single aisle aircraft order for the Chinese market. Deliveries are expected to run in stages from 2016 through to 2020. Under the deal China Eastern will dispose of 15 737-300s of 1991-1998 vintage and five 757-200s of 2004 and 2005 vintage, which were mainly deployed on domestic routes, back to Boeing. The 757 aircraft represent a significant opportunity for some airlines and should fetch a good price.
Now, as we know, under Chinese regulations the purchase price should be disclosed but Boeing cannot let that happen and as such China Eastern will have to go down the usual route of applying for a stock exchange waiver. In this instance that is a must, as we here at Airline Economics understand that China Eastern got an exceptional deal indeed on this occasion.
The extent of the price concessions being far more favourable than price concessions granted in the 2012 order agreement, which we know to have been substantial. China Eastern has therefore ordered these aircraft on the basis that they cannot lose no matter what the market does and that in turn should lead us to question – How can any Chinese low-cost carrier or indeed any potential low-cost operation looking to enter the market compete against such a very large, state-backed airline that is obtaining aircraft at such very low prices? The only truthful answer is “with difficulty”.
China Eastern will pay for the aircraft through a mix of working capital, bank loans from commercial banks (which will increase the debt-to-equity ratio) and other sources of financing available at the time. The aircraft will be used to build a route network with Shanghai as the core hub and Xi'an and Kunming as the regional hubs. China Eastern stated that it decided to purchase the Boeing aircraft to use in “flight waves” with the existing 737NG fleet to increase the operation efficiency of the airline. The acquisition will increase the ATKs of the Company by approximately 13.49% (based on the ATKs of the Company as at 31 December 2013).
It is also interesting to note that China Eastern had the 15 737-300s and five 757-200s on the books at an unaudited book value of around RMB1.52 billion, representing 1.1% of the audited total assets value of the airline company as of December 31, 2013. Yet we know full well from the Airline Economics Fleet Database that these aircraft are actually worth no more than RMB756.8 million.
This is another example of airlines not keeping track of actual asset values. One wonders if in this instance Boeing will be made to pay the RMB1.52bn valuation or close to it so that no questions are raised in Chinese political circles or even the Chinese media. We are also reminded that this is the case in the China Eastern disclosure documents, which state that “the consideration of the Disposal is based on the unaudited book value”. Either way, Boeing will be paying in USD cash instalments for the aircraft and they will be delivered back to Boeing in stages from this year (2014) to 2016.
The ATKs of the disposed aircraft in 2013 was approximately 502,116,835 tonne kilometers, representing approximately 2.31% of the ATKs of China Eastern company as of December 31, 2013. Without considering the adjustments to be made to the aircraft fleet of the company as a result of the market conditions and the age of the aircraft, the aircraft disposal will decrease the ATKs of the Company by approximately 2.31% (based on the ATKs of the Company as at December 31, 2013).
We all know that the world of aircraft orders is one of closed deals tailored to specific situations, and well it should be, but from time to time these aircraft deals end up being a very tough call for the manufacturers. This deal is without question a hard one for Boeing and does not carry a great margin – So the “worth $8bn at list prices” quote from the Boeing press release late last week is a bit of a joke.
Still, should OEM shareholders question when a price offered is too low or is an order a good thing no matter what the margin in the battle for market share? Taking into account what is going on in the aftermarket and the sales front combined at OEMs, this is a question that will be pondered over by shareholders and the mainstream media alike over the coming years. Boeing and China Eastern were wise not to hold this order back for Farnborough and the additional media attention that it would garner.