Tuesday, 26 July 2011

American Airlines Orders 460 Planes

AMR Corp.'s American Airlines, despite years of losses and an increasing debt load, showed it is still a high roller by ordering 460 new aircraft from Boeing Co. and Airbus with a total sticker 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.
    LM Otero/Associated Press
    AMR's American Airlines ordered 460 new planes, 200 from longtime provider Boeing and 260 from Airbus.
The plane manufacturers have committed to $13 billion in lease financing to fully cover the first 230 deliveries, meaning American won't have to strain its already dented balance sheet by raising capital on its own to pay for the new planes. Tom Horton, AMR's president, said Wednesday that all of the carrier's new orders are financed from 2013 through 2016 and 80% in 2017.
Separately, AMR on Wednesday said its second-quarter loss widened to $286 million from $11 million a year earlier. The Fort Worth, Texas, company is expected to be the only major U.S. carrier to land in red ink in the June quarter, normally one of the industry's most profitable of the year. AMR's total debt broadened to $17.1 billion on June 30, compared with $16.1 billion a year earlier, and its cash balance was at $5.1 billion, about the same as a year earlier.
Revenue rose 7.8% to $6.1 billion. But unit revenue, the amount taken in for each seat flown a mile, rose just 4.9%, a more modest improvement than the company's rivals are expected to report.
Shares in AMR fell one cent to $4.92 at 4 p.m. in composite trading on the New York Stock Exchange. Boeing's stock rose 2.2%, or $1.54, to $72.31, also on the NYSE. Shares in EADS rose 3.6% to €24.79 ($35.09) in Paris.
American blamed higher fuel prices and said it is taking steps to cut costs and boost revenue. The company said it intends to spin off to shareholders its regional airline unit, American Eagle, to diversify its suppliers of feeder flying and give it access to the most competitive rates. The company said it also is open to a sale of Eagle. But after trying to sell the unit on-and-off since 2007, it is proceeding with the spinoff plan, which would place Eagle's aircraft and debt obligations on AMR's books.
American also said it will cancel flights this fall between San Francisco and Honolulu and between Los Angeles and San Salvador, El Salvador. It said it may tweak its winter schedule over the Atlantic, will close its reservations office in Dublin and temporarily suspend its new route between New York and Tokyo's Haneda Airport from this fall through the middle of 2012.
The new 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 Gerard Arpey, AMR's chairman and chief executive. 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.
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."
Standard & Poor's Corp. said the massive plane order doesn't affect its credit ratings on AMR and American. "We believe the result of these transactions will, over time, result in an airline that is more profitable because of the planes' fuel efficiency, but also more heavily indebted," the ratings agency said. Including operating leases and pension obligations, S&P puts AMR's fully adjusted debt at $24 billion.
Boeing, which had been on the fence over whether to offer a 737 with new engines or to build an all-new successor model, apparently decided it was worth keeping American's business by going with a new-engine version of the 737. Boeing also worried about cannibalizing its current 737 order book, which stands at more than 2,100 orders.
Jim Albaugh, CEO of Boeing's commercial-plane unit, said Wednesday the new-engine 737 is expected to enter service in 2018. "While the technology was there to do a [new] airplane, the production system was not well understood to be able to get to 60 planes per month," Mr. Albaugh said.
He said Boeing engineers in Seattle are still working to finalize the upgraded 737's configuration and that Boeing's directors are likely to decide whether to move forward on the project at their meeting next month. Since 1996, Boeing has been American's sole-source airplane provider. But within the past few months, Airbus presented American an attractive offer for single-aisle jets. American then surprised Boeing by giving the U.S. plane maker an opportunity to submit a counteroffer, according to people familiar with the matter. Boeing then counter-offered and was forced to make a decision on putting a new engine on the 737.
For Airbus, the AMR order marks a huge victory. The European plane maker for years has tried to sell planes to some of the largest U.S. carriers that didn't fly Airbuses. Two of those, Delta Air Lines Inc. and Continental Airlines Inc., both are now parts of merged carriers that operate Airbus jets. With the exception of Southwest Airlines Co., which only flies 737s, American was the last big U.S. carrier without any Airbuses.
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. A new Boeing replacement plane could potentially eclipse the A320neo in just a few years. But instead, Airbus has a big headstart with hundreds of A320neos on order and contracts with suppliers sewn up.

American Airlines Orders 460 Planes - WSJ.com

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