Boeing, Airbus to provide new fleet for American Airlines

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AMR Corp.’s American Airlines placed a massive aircraft order with Boeing and Airbus, marking a move that will replace the existing aging fleet with 460 new aircraft, at a total price of nearly $40 billion.

The third-largest U.S.airline by traffic said Wednesday it will purchase 260 A320 planes from Airbus, a unit of European Aeronautics Defence & Space Co., the first Airbus order American has placed since the late 1980s. American also will buy 200 additional 737s from longtime supplier Boeing. These new planes, which seat between 150 and 180 passengers, will replace American’s older, less fuel-efficient domestic aircraft.

“With today’s news, we expect to have the youngest and most fuel-efficient fleet among our peers in the U.S.industry within five years,” Gerard Arpey, chairman and CEO of the airline, said in a statement. “This new fleet will dramatically improve our fuel and operating costs, while enhancing our financial flexibility.”

Airbus on a high

This is big news for Airbus, entering the U.S.aviation sector after a long break, and taking away the reins of exclusivity from Boeing, the prime supplier of American Airlines.

The breakthrough came as Boeing, the U.S. plane maker, shelved the option of making an all-new 737 short-haul jet and followed Airbus by choosing the cheaper and quicker route of new engines, unlocking its own share of an American order for a total 460 jets.

In recent weeks, the airline industry was riveted by the drama of Airbus and Boeing making competing bids to overhaul American’s fleet. American currently flies an all-Boeing fleet.

Fuel-efficiency, cost reduction

The need for fuel-efficiency was evident in AMR’s second-quarter results. Revenue rose to $6.11 billion from $5.67 billion a year ago, thanks to higher fares and fees. But American’s fuel bill rose 33 percent an increase of $547 million from the same period last year, outstripping the gain in revenue. Fuel has overtaken labor as the airline’s biggest expense.

The new narrow-body airplanes should help on the cost and revenue front. They are expected to consume 35% less fuel per seat than the MD-80 planes many of them will replace, said Arpey. And when American begins in 2017 and 2018 to take delivery of A320s and 737s with new engines, those planes will be 15% more fuel efficient than the current 737s and A320s.

Boeing no more exclusive

For Boeing, the order marks only half the victory, as it is no more the exclusive supplier of American Airlines.

Commercially, Boeing’s decision not to build a 737 replacement plane, at least for now, also is widely seen as a win for Airbus. Many industry experts said that if Boeing could leapfrog the A320neo, an A320 with an upgraded engine that Airbus has been selling since December, with a new model, Airbus would find itself in a difficult situation.

Jim Albaugh, CEO and president of Renton-based Boeing Commercial Airplanes, in a new release called “American Airlines is an industry leader whose vision and disciplined approach to growth has made it one of the largest airlines in theworld.

“This agreement will provide American Airlines with the most capable airplanes in the narrow-body marketplace and continue to deliver industry leading economics. Demand for the 737 remains very strong from customers around the world and we have deliberately retained delivery positions to meet the fleet requirements for all our valuedcustomers.”

The order is significant for Renton because it includes 100 737s equipped with a new, more fuel-efficient engine, with options for 60 more. Until now, Boeing has only talked about the possibility of developing a new engine as a possible alternative or initial step to building a replacement for the737.

Skepticism

In view of AMR’s increasing debt load and losses over the years, many from the industry are skeptical as to whether this investment of $40 billion, and a new fleet, will help to improve figures.

Jamie Baker of J.P. Morgan said AMR’s poor financial results and worsening margin deficit to its rivals raise questions about the wisdom of a giant aircraft purchase. “We cannot reconcile spending incremental capital while failing to earn returns on [the] existing capital base,” he wrote in a research note. “We think the best thing AMR can do is figure out a way to generate more profitable flying with the current fleet.”

In a separate announcement, AMR Corp., also confirmed that it plans to spin off its American Eagle regional-flying subsidiary as a separate company.

The twin announcements overshadowed AMR’s news that it lost $286 million in the second quarter, as rising fuel prices wiped out gains in revenue.

Shutting down critics, American will have to now prove that this decision of a change in fleet on a major scale is timely.

Sources: WSJ, msnbc, economictimes, seattlepi

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