Update, June 5:
Here are a couple of news articles about this story:
Here is a 19-minute podcast on this story by Addison Schonland, Ernie Arvai, Erkan Pinar and us.
Be still my heart.
United Airlines requested RFPs from Airbus and Boeing for 150 airplanes, a mix of wide- and -narrow-body orders, including replacements for 97 Boeing 757s.
Why “be still my heart?” Because CEO Glenn Tilton has previously shown zero inclination to invest in United, preferring to shop the airline for a merger. United previously announced that long-standing orders for Airbus A320s would be canceled, forfeiting tens of millions in deposits–though we don’t believe these actually were canceled, not having shown up this way on the Airbus orders tally.
We were emailed, Where is United going to get this money? Surely UAL will demand and get backstop financing from the manufacturers, but with backlogs of most of the airplanes at both manufacturers equaling five or six years of production, one would hope by that time the financial markets will actually be freely accessible again.
Can UAL get airplanes before that backlog? Yes, some, will certainly be available. Orders for more than 50 787s have been canceled, although some have already been assigned to other customers to make up for delays of 15-36 months. The 25 canceled by RBS’s leasing unit are subject to a tug-of-war within Boeing as to their disposition. Production wants to absorb the positions to reduce delays. Sales wants to grab the positions to win campaigns precisely like that for United–as well as KLM-Air France and others that have yet to order the plane.
The ability of Boeing to offer early delivery positions for American Airlines, a holdover from its 1996 exclusive supplier contract with AA, enabled Boeing to sell the 787 over the Airbus A350, which could only offer positions late next decade. AA received 2012 delivery slots from Boeing for the 787-9 (now slated for 2013), a good six years ahead of the A350 positions. (Some in Airbus believe AA would not have ordered the A350 in any case, given the testy relations between AA and Airbus that exists going back to the CEO days of Robert Crandall.)
So how will UAL’s competition shape up?
For long-haul, UAL has been solidly Boeing. For US domestic, UAL has predominately been Airbus, 757 excepted.
UAL’s 747-400s are among the oldest produced and it was a launch customer for the 777-200 “A” model. The 767s are long-in-the-tooth and the 757s are aging. UA already is in the process of phasing out the 737 Classics in favor of the A319 and A320.
Here’s how we see a UAL fleet renewal:
VLA: A380 vs. 747-8I. We know that well before the economic crisis began in September that UAL officials visited Boeing and toured the Customer Experience Center to view the 787 and 748 interiors. No surprise there, and probably UA has done the same with the A380 and A350. UAL has said in the past it wasn’t very interested in the A380, but we believe there are some routes that work for UAL with an A380. Toyko Narita and London Heathrow, of course, are especially constrained. If UAL were to order the A380, would it be very many or might UA follow the Lufthansa example and order a mix of the fleet?
Or might UA follow the American Airlines example and go for smaller planes in favor of frequency and the ability to shift equipment as demand requires?
There is no tougher task than to find good routes for VLAs in a down market, while it is much easier to shift smaller jets around in off-season and add frequency if the slots are available in peak seasons.
Given the importance of NRT and LHR, we think UA will buy some VLAs. The A380 is, in our view, more technologically advanced and more spacious for passengers than the 748. A small number of A380s (fewer than 20) seems to make sense.
Mid-Size Twin-Aisle: Supplement the VLAs with the 777-300ER; the 787-1000 is too small even if it were built and the A350-1000 is too far down the pike, plus the 777 is already in UAL’s fleet. But: perhaps UA might simply lease the -300ER until the A350-1000 is available and proves whether it lives up to promises or Boeing builds a better mousetrap.The 777-300ER is clearly a superb airplane but one way or another, we see a replacement or a major upgrade as early as 2020. Why hook into a 25 year decision for something that will be less than 10 years old from your EIS?
We like the medium-term lease option. It gives UAL a lot of flexibility.
Update, June 5: We overlooked discussion about replacing the 767. This is an easy one: the 787 is sized right across from the 767; Airbus forfeited this market when it chose to straddle the 787 and 777.
Single-Aisle: The A319/320 is already the mainstay of UA’s domestic fleet. Add the A321 to replace the 757s for commonality.