AMR Corporation, the parent company of American Airlines announced an order for 460 narrow body airplanes (+465 options) this morning. The order is the largest in aviation history, dwarfing recent orders for 180 A320 family aircraft for Indigo, and 200 A320neos for Air Asia. Deliveries are scheduled to begin in 2013 and proceed till 2022.
The order is split between Airbus and Boeing; with Airbus getting a larger share of the orders than Boeing (260 vs. 200). The purchase contract with Airbus is for 130 Airbus A320 family aircraft (A318, A319, A320, A321), as well as 130 Airbus A320neo family aircraft (A319neo, A320neo, A321neo). All 260 of the Airbus aircraft will feature the fuel-saving blended “sharklets.” Deliveries of the A320 classics will begin in 2013 while the A320neos will begin arriving on property in 2017. Additionally, American has a staggering 365 purchase options for both the A320 and the A320neos.
The order for Boeing on the other hand is for 100 Boeing 737NG models of any variant (737-600/700/800/900ER), 97 new firm orders with 3 previous purchase options being firmed up. These orders come in addition to 51 orders remaining for the 737NG from previous purchases. In addition to the firm orders; American has secured 40 further purchase options for the Boeing 737NG. Deliveries of the 737NGs will start in 2013 as well. The second half of the purchase consists of a Letter of Intent (LOI) from American to Boeing, committing the carrier to purchase 100 of the re-engined Boeing 737s, which Flightblogger John Ostrower expects to be officially launched in the fourth quarter of this year. The deal further includes 60 purchase options for the 737RE as it is being called.
American has secured roughly $13 billion in committed financing from the manufacturers; which will cover delivery of the first 230 airplanes on order, and reduce risk for all parties concerned. They have selected CFM International’s LEAP-X engines for both aircraft families.
According to American, the aircraft will be used to consolidate 4 current aircraft families operated (737NG, MD-80,757, and 767-200) into 2 (737 and A320). American further states that:
The 737 and A320 families offer significant cost reduction opportunities in replacing American’s older fleet. For example, Boeing and Airbus aircraft in the 737 and A320 families offer a 35 percent reduction in fuel cost per seat versus the MD-80 and a 12 percent and 15 percent fuel cost reduction per seat, respectively, versus the 757 and 767-200.
This should be welcome news to a carrier who has been struggling heavily with costs for the past few years.
American took delivery of 76 737-800s (with the new Boeing Sky Interiors) in 2009 and 2010, with 54 to be delivered between 2011 and 2013. They also have 8 firm orders for Boeing 777-300ERs for delivery in 2012~2013, and 7 remaining deliveries for the 777-200ER between 2013 and 2016. They also have on order 42 Boeing 787-9 aircraft (contingent on pilot contracts) with 52 purchase options.
The order has to be a big blow to Boeing. American was one of their most loyal customers, operating over 600 Boeing aircraft (including McDonnell Douglas). Furthermore, American and Airbus had poor relations stemming from the crash of American Flight 587 at New York JFK (for which both parties blamed one-another). But all indications here are that American had been poking around with Airbus for a while before this order; I guess time, or 10 years of almost non-stop losses, can heal all wounds.
Apparently, Airbus had their order in the bag long before the announcement today; and Boeing had no idea that all of this was going on till American dumped it in their lap. So when you look at it from that context, Boeing has at least succeeded in salvaging their relationship with American, and winning 200 orders (not an insignificant amount). But when you consider that Boeing stubbornly claimed that the 737-800 classic would have better operating costs than the A320neo, they come off looking a bit like fools. Also to be taken into account is the fact that Boeing now has to re-engine; after repeatedly stating that its customers preferred a new airplane. Dominic Gates from The Seattle Times reports about the flurry of activity surrounding Boeing as they tried to get a piece of the order, and reports that the time-frame for Boeing’s new airplane has slipped to 2020-2025.
But all is not lost for Boeing. Having made the decision to re-engine; they can finally approach customers with a product roughly equivalent to that of Airbus when making sales. According to Leeham News and Comment, the 737RE should be roughly 10-15% more fuel efficient than the 737NG. Using that figure and my rough estimations based on this study, the 737-700RE and A319neo should be roughly equal in-terms of seat-mile operating costs (319 somewhat better), the 737-800RE beats the A320neo operating costs by 5-7%, and the A321neo still blows the 737-900ER~RE out of the water.
So this new airplane bring Boeing narrow-bodies back to parity with Airbus and helps ensure that bit players like COMAC and Irkut don’t grab a foothold in the large narrowbody market. Furthermore; the American order can be a bit of a double-edged sword for Airbus. Sure they do grab a very important Boeing customer, but what unfortunately has happened is; they are now nearly out of significant neo delivery slots till almost 2020. Furthermore, with 365 purchase options, American has the ability to cut out its competitors by exercising a few; meaning that carriers such as Delta and United who have yet to make a decision on their next generation of aircraft purchases will be able to get their hands on 737REs faster than neos. Other major carriers in this range are; Air France-KLM, British Airways/IAG, Lufthansa Group, Qantas, the Chinese, Jet Airways/Air India/Kingfisher, Turkish Airlines (though large 320 OEO and 737NG backlog), Ryanair/EasyJet/and Southwest Airlines.
For American Airlines, this order is a bold move and definite step in the right direction. They’ve been stuck in a streak of heavy losses, Q2 2011′s $286 million one just being the latest. A lot of that has to do with fuel, where American saw costs that were $525 million higher than Q2 2010 (from their conference call, which I’ll have thoughts out on later). With problems that large, it’s no wonder that American is trying to get rid of its fuel guzzling MD-80s. The 737NGs and A320 OEOs provide instant reductions of 35% on the Mad Dogs, as well as 12% on the 757s and 15% on the 767s. This reduction in fuel prices should definitely help the bottom line, and provide a hedge for potentially higher labor costs in the up-coming contracts.
On the narrow-body side, the flexibility in types and improved performance gives American the ability to better match capacity to demand. For example, in Miami, American has been hurt by the lack of a suitable sub-150 seat aircraft (MD-80s don’t have the range to pull of most routes). Now they potentially have both the 737-700 and the Airbus A319 available to serve that purpose. Plus, as Delta has already figured out; the 737-700 is a great way to serve Latin American markets. On the larger end, the 737-900ER and A321 should help in flight constrained markets like NYC and Los Angeles.
American currently has 359 MD-80s (220), 757s (124), and 767-200s (15) in their fleet. Therefore, the 460 firm orders represents theoretical fleet growth of 28.1%. However, the way I see it; only about 360 of these orders (320 OEO, 737NG, 320neo) are to replace the aforementioned aircraft. The A321neo is far and away the best 757 replacement (can perform more than 80% of required routes w. similar payload and lower costs), so my guess is that the majority of firm neos will be 321s. The 737RE I believe, is a way for American to hedge its bets for the next round of fleet replacement, which they’ll place in the next 5-7 years. The reason for taking both A320s and 737NGs is that neither manufacturer could possibly deliver enough airplanes in American’s preferred time-frame to replace the MD-80s (5-6 years); with that in mind here’s how I see American’s narrow-body fleet playing out in the next few years.
2013-2017: Replace all MD-80s and 767-200s with 320oeo and 737NG, as well as a few of the oldest 757s
2017-2022: Replace remaining 757s, as well as some/most 737-900ERs and A321oeos with A321neo
2018-2025+: Make a decision between 320neo vs. 737RE to replace 737NGs and A320 classics
2025+: Choose from Airbus vs. Boeing New Airplane
One thing that I do find interesting about the entire plan is that the 767-200s are going to be replaced with narrowbodies. These 767s fly trans-continental routes in the US so range is not an issue, but I do find it a bit strange because American has often trumpeted that their widebodies were an advantage on transcons. In 2006, American gave the following statement in a press release:
American’s 15 Boeing 767- 200s are widebody aircraft, which customers prefer to the narrowbody aircraft flown by other airlines since the 767-200s offer more room for passengers to move about the cabin
While a lot has changed since 2006 in terms of fuel, the fact remains that American has a significant revenue premium in transcon markets. How much of that is due to the widebody factor? And where do they go from here; are the 737-900ER and/or Airbus A321 going to be economically or physically viable in 3-class configurations? And more importantly; where’s the differentiation between American and United P.S now?
Overlooked in all of this is the clarity that was given on American’s future widebody fleet. They converted a further two options for the 777-300ER into firm orders, bringing the total to 8. It’s looking more and more like American will slowly add a couple of frames at a time, up until critical mass of 20-25 airframes. And in-spite of the orders for the larger frame, American also gave an indication that they will in fact take delivery of their remaining 7 orders for the smaller 777-200ERs. Some feel that this narrow-body order gives indication that American may also go Airbus for some widebodies. But, I just don’t see it in the near future. The 787-9 is the perfect aircraft to replace their 767-300ERs, and can perform almost every mission in American’s network (though I feel that the A330-300 might be better from Miami to Latin America). And while the 777-200ERs and 300ERs may eventually need replacing, the 200ER can be replaced with the 787-9 (remember, 58 purchase options), and a 300ER replacement is still a good ways off (they’ll at least wait to see what Boeing does with the 787-10).
On the whole, this order represents a dramatic new step in the right direction for American. It doesn’t solve all of their problems; they still need a 100 seater (though the Eagle divestiture may provide some clarity on that), and there are those pesky labor contracts. But as a whole, this move should at least keep American afloat until they can figure out the rest of their issues.
Other Opinions
Devesh Agarwal at Bangalore Aviation
Scott Hamilton from Leeham News and Comment