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

By Geoffrey Smith -- 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.

There is also a more Macchiavellian explanation, although perhaps not the most likely one. 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.

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