American Airlines splits record 460 aircraft deal between Airbus, Boeing

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American Airlines has split a giant order for 460 single-aisle jets worth up to US$40 billion (24 billion pounds) between Boeing and its European rival Airbus, breaking off an exclusive relationship with Boeing.

The record large order placed by the AMR Corp unit gives Airbus a stronger foothold in US markets. The deal also rapidly refreshes American Airlines’ ageing fleet with more fuel-efficient planes to better compete with US rivals.

For Boeing, the order is a bittersweet victory, marking the end of an exclusivity deal with American Airlines. The US plane maker salvaged its portion of the order by offering to put a new engine in its best-selling 737, retreating from a more ambitious plan to completely redesign the plane.
“My initial reaction is, ‘Wow, what a big deal!'” said Alex Hamilton, managing director of EarlyBirdCapital. “I think that speaks to the underlying robustness of the cycle, if you will, just because it’s the largest order in aircraft history.”
“I think it’s a marginal victory for Boeing,” Hamilton said. “From a marketing standpoint it’s a big deal for Airbus.”

The deal, which calls for American to buy 200 Boeing 737s and 260 Airbus A320s, comes after tense haggling as American Airlines played the world’s two largest plane makers off against each other to win concessions from each.

American Airlines will take delivery of 100 aircraft from Boeing’s current 737NG family starting in 2013, including three 737-800 options that had been exercised as of July 1.

American Airlines also intends to order 100 of Boeing’s expected new version of the 737NG, featuring CFM International’s Leap-X engine.

The Leap-X relies mostly on modern materials rather than structural changes to save fuel. CFM International is a joint venture between General Electric and Safran.

The carrier is willing to become the launch customer for the upgraded 737, which needs approval by Boeing’s directors.

The airline has options for another 100 Boeing 737s and 365 options and purchase rights for additional Airbus aircraft. American Airlines said it has the flexibility to convert the new deliveries into variants within the 737 family, which features different seating capacities and ranges.

The carrier said it also has the option to convert its order into variants within the A320 family. The carrier said it would take delivery of 130 current-generation Airbus A320s beginning in 2013.

Starting in 2017, American will begin taking delivery of 130 aircraft from the A320neo, which will feature a new engine and provide 15 percent better fuel efficiency.

Boeing and Airbus compete for dominance in the narrowbody airplane market whose value is estimated at US$2 trillion over the next 20 years. Last year, Airbus said it would beef up its A320 with a new, more fuel-efficient engine. The plane known as the A320neo is scheduled to enter service in late 2015.

For more than a year, Boeing has debated whether to re-engine or redesign its competing 737. A redesigned plane could have been brought to market around 2020, but would provide greater fuel efficiency.

But delays in the decision left an opening for Airbus to win massive orders for its neo from customers who did not want to wait for Boeing to decide. Airbus dominated the Paris Air Show last month with orders for the A320neo.

To secure a chunk of the AMR order — and perhaps other upcoming US airline orders — Boeing agreed to re-engine the plane. AMR has not ordered Airbus planes since the late 1980s.
“Airbus is penetrating a pure Boeing client with a mix of A320 and A320neo, which addresses the risk of one aircraft cannibalising demand for the other,” said Yann Derocles, aerospace analyst at Oddo Securities. “It has put so much pressure on Boeing that Boeing decided to re-engine the 737.”

Boeing, however, still could build an all-new 737.

American Airlines, formerly the largest US airline, is now the third-largest US carrier after United Continental Holdings and Delta Air Lines. It is struggling to bolster its position and believes new planes will help.
“There’s instantaneous financial benefits,” said Vasu Raja, managing director in charge of AMR’s fleet planning, noting savings on fuel costs by flying more modern aircraft.
“We’re able to derive a significant amount of income statement improvement through this,” Raja said.

He noted that 50 percent of the deal is financed through operating leases. American won about US$13 billion in financing provided by the manufacturers through lease transactions.
“It will help them in terms of fuel, obviously,” said Steve Wilder, analyst at Capstone Investments. “These are newer planes and cleaner-running planes. But my guess is the lease expense is going to offset that.

AMR on Wednesday also reported a net loss of US$286 million, or 85 cents per share, for the second quarter, compared with a year-ago loss of US$11 million, or 3 cents per share. The results were weaker than Wall Street forecasts for a loss of 81 cents per share, according to Thomson Reuters I/B/E/S.