Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
Countdown at American for huge order
American Airlines is believed ready to decide on replacing as many as 250 narrow-bodies in its fleet as early as this week.
The Wall Street Journal published this report Sunday outlining the stakes.
We suggested recently that AA could split the order, sticking with Boeing for the 737-800 to replace more than 200 aging MD-80s; and the Airbus A321neo to replace the more than 100 Boeing 757s.
The competition is a tough one, as The WSJ article details. As for the aircraft, we’re not sure adding A320 Legacy airplanes to the fleet in place of the 737-800, in and of itself, makes a lot of sense unless (1) American needs more airplanes quicker than Boeing can provide to replace the gas-guzzling MD-80s and (2) it’s tied to a deal for the A320/321 neo.
AirInsight will publish a report Tuesday (July 12) examining the economics of which airplane best replaces American’s 757s: the 737-900ER or the A321neo.
There really isn’t much competition between the A320 “classic” and the 737-900ER.
So a comparison between the neo and the 737 is pretty much redundant.
The comparison is between the A321neo and 739ER.
These are direct competitors.
With Airbus arranging some $6B in financing for up to a $23B order (at list prices), it would seem Airbus might have their food into the AA offices in Fort Worth. My guess is both Boeing and Airbus will heaverily discount the prices of their airplanes to get the order. But Boeing has to offer something else in the area of financing. AA is not a strong airline financially, they will need help completing the order. You are probibly right, Scott, the MD-80s will continue to be replaced by the B-737-800. But adding the A-321NEO to replace the B-757s may make that order unsupportable from a maintenance and parts POV. There would be additional costs associated with introducing an entirely new airplane type that AA may not want to pay. Will Airbus help? Buying the B-737-900ER makes more sense in crew training costs, parts, and maintenance. Plus AA can use the common type rating between the B-739 and B-738 in crew scheduling and dispatching.
One option might be a short term lease on the A320 classic, similar to the one arranged by Singapore Airlines for the A330. With an increase in production, Airbus should have good availability on A320 classics in 2014-2015 then little availability on NEOs until the end of the decade. As well as helping with production planning, this kind of lease would get AA early and relatively efficient replacements for their MD-80s while tying them into Airbus for the longer term with NEOs.
I agree that long term replacement of MD-80s by A320 classics doesn’t make a lot of sense. Of course there’s nothing stopping AA splitting the deal between Airbus as you suggest, even if Airbus propose a single supplier arrangement.
Lots of variables. Apparently replacing the MDs is urgent, but the 757s is less so. AA has referred to this buy as their 2020 plan, so maybe they take the MD replacements first and the 757s later in the decade which might B’s NSA a chance.
Can AA break its exclusive contract with B, which I believe is good thru 2018? What are the specific terms of this agreement? (SCOTT do you know?) Can A break the agreement or order from A under its terms on the ground that B does not have the plane AA wants and A does? If AA can break it, would they want to? What would they lose/gain by doing so? Does the contract require that AA order and take delivery before it expires, or must they only order from B up to the end of the contract for delivery after it expires? If AA can’t even place an order with A or take delivery from A until the contract expires, then maybe A goes only with 321neo after that. Perhaps, the most interesting speculation from a strictly law point of view is: If A induces AA to break or otherwise fail to perform in full its obligations under the exlcusive buy contract, does B have a claim against A for the tortious or intentional interference with B’s contract rights, in addition to breach of contract claim against AA? Imagine the mess that litigation would cause. Perhaps years of fighting over the meaning and intent of the parties:eg. are the planes B is offering really so inferior to A’s that AA can order from A? Talk about a lawyers’ relief act. B might even try to get an injunction against the AA/A deal, or at the very least A would have to pay B its damages (nice variation on “pay-to-play”). If the contract is in fact enforcable so that AA cannot buy from A, then that pretty much says, A is going with B before it expires.
How quickly can AA actually get full replacement of its 229 MDs? B delivered 45 738s last year but only 2 so far this year, and AA has only 15 more on order. Oddley, AA (like Delta) has gotten rid of at least 26 738s according to Planespotters. If they are so hot to replace the MDs, why did they do this? I understand that AA’s contract with B gives them priviledged ordering positions for hundreds of planes (SCOTT, again, so you know the details?). At 45/yeard, B could replace all the MDs in five years, or may be earlier now that B is raising 737production. If AA is really serious about replaceing the MDs ASAP, then they stick with the 738 for all the reasons KC135 points out, unless A can offer the A320 classic in large enough numbers to replace them by 2016, induced by the promise of A320/321neos later?
Or does the AA order finally force B’s hand, and make them offer 738s, or a combo of 738REs and 738 NGs, and also the NSP to replace the 757s starting in the early 2020s? Quit a dance, as Albaugh would say.
Scott already commented on the exclusive buy deal last weeke (http://leehamnews.wordpress.com/2011/07/01/us-airlines-ready-orders/).
Boeing agreed not to enforce it in order to get EU approval of the Boeing/ MD merger. As far as I understand it, even though the contract is officially in force, Boeing will not enforce it. Question would if this agreement is actually legally binding or if it is just a “gentlemen’s agreement”?
Not convinced the old exclusivity agreement would be enforceable under current laws.
Unfortunately for Boeing, their cash resources are pretty tied up whereas EADS is cash rich and would probably fund an AA deal.
Boeing agreed not to enforce the exclusivity agreement with AA as part of the agreement with the EU to get approval for the McDonnell-Douglas takeover.
Reference: https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=24 Brooklyn J. Int’l L. 593&srctype=smi&srcid=3B15&key=699ac85c64c244159fb713af86cd9d97
I think the discounts and conditions offered by Airbus and Boeing will be a reflection of the value of the products for the next 25 years, their backlogs, long term strategy and maybe pollutions/ noise and capabilities of their products.
If Airbus offers a very attractive deal, we can only guess what Boeing is willing to offers in the current situation..
This exclusivity agreement is intriguing, because it is taking the hailed free market for a ride and no equivalent exists, e.g. in Europe.
Did one of the parties (indirectly) play the politics / nationalism card already?
Have you forgotten the deep financial hole Airbus is in over the A-400? They also have officially delayed two versions of the A-350. Then there still is the financial hole they dug with the A-380, and are still in.
Boeing is also in a few deep holes with the B-787 and B-747-8, although the B-747-8 hole may not be very deep.
Neither OEM can finance 250 new build airplanes. That is why Airbus has become the ‘middle man’ in helping to arrange the financing.
The most interesting part of the whole AA ordering new airplanes story is they talked to Airbus first, got the Airbus proposal in writing, then went to talk to Boeing, maybe even showing the Airbus offer to them. AA is an expert at playing both OEMs against each other. AA is also known for buying fleets of airplanes on terms that is only favorable to them, not the OEMs. That is how they got their MD-80s and F-100s in the first place. Both of those deals started those OEMs down the “out of business road”.
Sorry, but no. Airbus got the governments to pick up the tab for the A400. They will stop losing money on the A380 if not next year, then year after next. They have a massive order backlog, against which banks will lend them money, stretching out to 2018, meaning they get better tenors. Nevertheless, I agree Airbus is only the middle-man here, but they can e.g. provide guarantees to banks which Boeing may not be able to or not wish to provide.
I seriously doubt they showed the Airbus offer to Boeing. That would not just be unprofessional, but also illegal. That’s what NDAs are for, and I would not believe for a moment that AA’s management are a bunch of cowboys not honouring theirs.
Well, kind of sort of. EADS had to eat somewhere between E5B and E11B for the A-400 deal to go through. Even when the A-380 stops loosing money on each delivery, they have to start climbing out of that E20B hole.
Yes, Airbus does have a huge backlog of airplanes. That could work against them for any airlines wanting deliveries before 2018.
I guess you don’t understand how AA does business. They are very tough to do business with. They are even tougher on their compitition, having driven DL out of DFW (DFW use to be DL’s second biggest hub), and squshed Legend, etc. I don’t think companies are restricted from showing offers from competing OEMs trying to do business with them. I believe that only applies to the government. I know I can take an offer to buy a new truck from one Ford dealer, and show it to another one to try to get a better deal. I have don’t that many times, and dealers encourage it.
Oh look, Boeing has just dug its own hole on the KC-46…
http://www.bloomberg.com/news/2011-07-11/boeing-may-lose-400-million-more-on-tanker-air-force-says.html
They really wanted that contract, it seems. The money Airbus spent on bidding was probably well spent, and the US taxpayer should send them some chocolate as a thank you. 😉
It looks like Airbus is neither weak, constrained or desperate. They have 3 A320 lines, 3000 in the backlog, engine OEM taking care of (just) E1 billion investment and a waiting room of major carriers showing interest in the NEO (AF/KL, BA/IB, UA, DL.. ).
AA is important for Airbus but will have to pay a reasonable price. On Boeings negotiating position towards AA, judge yourself..
I think the A321 pulls the NEO for AA. Boeing can only counter a stretch derivative of a yet to be defined aircraft in 2022(?). If the A321NEO is a deal, what benefits would the 737-800 have over a A320NEO? A few seats and (no longer exclusive) commonality. Not range, fuel efficiency, cargo capablity, noise or pollution.. Buying spanking new 737-800s for the next 25 years in 2016 doesn’t look as good as it did 10 years ago.
The A319NEO, as a simple A320 shrink, will probably be too capable for a 1:1 MD80 replacement in AA network. I wonder what Airbus can do to make them lighter/cheaper.. Is the better optimized CS300 still around?
No doubt Airbus is offering 30 wingletted A321’s for 2012/13. A proven Airbus tactic of the past 5 years (quick, good, proven A330s to de-risk / offer quick wins in larger A350 deals)
I don’t think anyone said Airbus is in any danger of anything. Who said DL and UA were looking at the NEO? Both carriers will need new NBs before the first NEO, the A-320NEO is in service. Any order now, or in the near future for any NEO model can’t get them before 2018, at the earliest, and maybe later than that. Is Airbus willing to put their ‘bread and butter customers’ (those majors that consistantly buy Airbus airplanes) aside so that AA, and possibly DL and the new UA can get earlier delivery slots? I doubt it, that is not a smart business practice.
Please remember, the Boeing exclusive deal was not only with AA, but with DL and (then) CO, too. Is that a factor? I don’t know, only AA, DL, and the new UA know.
The A-319NEO offers the least improvement in fuel economy, and I don’t think AA, DL, or UA would be interested in replacing their MD-82/-83/-88s or early A-320s with a smaller airplane
As far as buying new airplanes of any type, including the B-73H, or the A-320NEO goes none will be economicly competitive 26 years from now.
As far as the A-321NEO for AA, we will have to wait and see. When do they want to replace the B-757s? What will the NSA do better (or worse) than the A-321NEO? If AA buys B-73Hs for the replacement of the MD-80 series, and later buys the A-321NEO to replace the B-757s, what is AA’s plan to intergate that type into their fleet maintenance, parts, crew training, dispatching, etc.?
I think this all hinges on the deal Boeing will offer, as Airbus has already tendered their offer.
Whatever the final selection process I trust sanity will prevail to ensure the absurd solus supply agreement isn’t reknewed. Whomever signed up for this must have been a paving slab short of a patio.
Twenty years ago quality competitors existed, the case is even more so now. One questions the reasoning in locking out all competitors for such an extended period. A truly Luddite mentality & one that effectively alientated AA from innovation & cost effective aeronautical solutions for twenty years, complete bonkers.
It’s a sensible business arrangement. The way I understand it they were offered the best price/conditions of any competitor in return for exclusivity. That works for both sides. Of course it only makes sense for the OEM as long as there is a potential competitor trying to make a sale. If Airbus did an O’Leary on them (you can buy any of our planes, here’s the list of prices we publish on the internet), then they would not have any advantage from it. But as was pointed out, at the time there were other OEMs, and Airbus is clearly not doing that now.
While I don’t have a clue with what’s going to happen, I still believe Boeing will offer AA something which AA won’t be able to refuse. This might also include AA being a launch customer for the B737NEO and/or B797.
While the A321NEO will be great for AA, AA can work with their current fleet of B757’s..many of which are < decade old.
Boeing can in theory have a plane by 2019-2021 which would be able to replace AA's B757..now will Boeing go for that market? We'll see.
Regarding availability- I don't think that would be a problem as I'm sure both of the manufacturers would be able to work with the various leasing agencies to get some frames.
And if the 757s were brand new, they are gas-guzzlers. Another ten years with them is a very risky proposition in the current circumstances in the oil market. The best thing AA can do is sell them off for freight conversion. Outside the niche markets and airlines to broke to buy/lease new planes to replace it, the plane type has no future as a passenger plane. Sad as that is.
Say what? Their newest B757’s are the best planes for the routes they fly. The CASM on a B757 is excellent for TPAC, Hawaii and “deep” South American routes.
For all distances the A321-200NEO can manage with a comparable load as the 757-200 it will probably have 25% better sfc. I ceed that the 757 could give the up to now best available CASM. Fuelprices are a multiburst timebomb though.
Phil, I believe it was Bob Crandel who signed the Boeing/AA agreement back in the mid 1990s. Crandel may not have been popular with the employees of AA, but he was a hard driving business man
20 years ago we had MD and Fokker in business. That MD was not the same company it was in the 1960s, the company changed, significantly, beginning in the 1970s with the introduction of the DC-10, and mostly for the worst. Fokker was always just hanging on with their F-28s. The F-100 and F-50 were suppose to save the company, instead both airplanes drove the last nails in the Fokker coffen.
jacobin777, I had not thought of that. Boeing could have been sand bagging the media all along, hoping to get AA (and maybe DL and UA later) to be the launch customer for a possible B-737RE, as well as the NSA.
Boeing will do their best, but I do not believe in miracles.
– they are in no position to give away aircraft
– the 737 in made in America, with all the cost levels included
– the NSA and a stretch of it will either come quick, 2019, and be compromised on engine technology or later & airlines already indicated they do not want to gamble on a decade away aircraft. Fuel is high now & some 757s are real old/worn.. many scrapped already.
– the 737RE will be compromised, that’s why Boeing keeps doubting in the first place. The 737-900RE would still be shorter & less capable then the A321..
IMO promising a miracle 797 won’t work. AA talks to GE/PW and RR too and knows to difference between airliners & dreamliners.
@Topboom
a) The hole of the A380 and the money they already lost on the A400 don’t matter. They sit on US$14 bn of cash. That’s only going to improve from here on.
b) I am afraid it is you who doesn’t understand how business deals work. You can not compare you buying a new pickup with this. There is no way that AA can legally show this offer to anyone. The first thing they do is sign an NDA. Remember the Leahy quote about Boeing still not knowing why they lost the CX deal a few years back. Sure AA can say ‘tough’ and post the offer on the internet, but they could then be sued.
I think Mr. Topboom is misslead by the massive differences in bookkeeping between Airbus and Boeing ( or any other EU versus US company.)
Just look at the rules on how to value assets and liabilities.
Perhaps you are partly right. I do not understand how an EU company can loose so much money on several programs yet still come out with some $14B in cash.
OTOH, Boeing, like all publicly traded companies in the US must use approved bookeeping methods of the SEC, and those books must be open to the public.
“like all publicly traded companies in the US must use approved bookeeping methods of the SEC, and those books must be open to the public.”
…and still we somehow managed to have the “unforeseen” meltdown of 2008, amongst others?!
You mean these kind of bookkeping methods:
http://gtpac.org/2010/08/pentagon-audit-boeing-violates-federal-account-rules-may-lose-271-million-in-government-payments/
And of course we have this kind of transparency: http://seekingalpha.com/article/277504-how-profitable-is-boeing-s-787-dreamliner-not-very
There is no OTOH. EADS works under approved book-keeping methods by the stock exchange rules it is listed on (Netherlands). More importantly however, the SEC is moving towards convergence of US and international standards:
http://www.sec.gov/news/press/2010/2010-27.htm
As to how Airbus can have that much cash while losing money on so many programmes – easy. They make enough money with the programmes they do not lose money on. A32x and A330. And by the way, I must admit a mistake. EADS is not sitting on US$14bn of cash. It’s US$17 billion and change.
http://online.wsj.com/article/BT-CO-20110513-712191.html
The trick ( or the difference ) is in how assets and liabilities are valuated.
European bookkeeping regulations require you to valuate very
conservativ (assets lowest, liabilities highest value).
Booking lawn ornaments as assets at list prices as Boeing seems to do
would not be possible in Europe.
There are other tricks around that allow painting a more rosy picture
under US regulations making enough difference to boost losses into
book profits.
..and so is plane acquisition/lease costs – amongst other items.
Boeing also gets to deprecate those ‘lawn ornaments’, too. It is in the US tax code. Had EADS built a plant in the US, they could deprecate their ‘lawn ornaments’ too. Maybe EADS-NA already does that?
I don’t know about the tax codes in European countries, so I won’t comment on them.
deprecate? if it fits?
Boeings reported assets of some $19b ?? in conjunction with the Dreamliner
and 747-8 project would require all semicompleted frames aka “lawn ornaments”
to have been valuated at listprices ( otherwise you don’t get near the summ
mentioned, we discussed this here earlier ).
Airbus in a similiar scenario would have to account at production cost or below ( imho and all that jazz ).
Independent of accounting rules US bookkeeping and reporting has a much
bigger Smoke and Mirrors component than elsewhere.
No one said the SEC (a branch of the US Government) is perfect. Most of the companies that publicly trade stock are mostly honest, some are not (Enron comes to mind). The SEC also failed to find out what Bernie Madoff was doing, for decades. The 2008 economic crisis began in the housing market, and quickly spread to other industries, including aircraft OEMs (if people loosing their jobs can no longer afford to fly, airlines can no longer afford new airplanes. But both Boeing and Airbus did much better than other companies in other industries.
Even for them, each and every potential order is very important to them, including the AA order (as well as any other airline or military contract), including orders for as few as 1 or 2 airplanes, not just one for some 250.
Both Airbus and Boeing are in a dog eat dog struggle for EVERY order. Each will win some and loose others. Each will use every advantage they might have to win an order, no matter how slight that advantage may be.
Aero Ninja; “You mean these kind of bookkeping methods:
http://gtpac.org/2010/08/pentagon-audit-boeing-violates-federal-account-rules-may-lose-271-million-in-government-payments/”
Seems there has been no final finding in this as in the same story is this quote;
“In Boeing’s case, a regional manager for the audit agency approved “a flawed audit that could have allowed Boeing to recover” the $271 million, Inspector General Gordon Heddell said in Sept. 23 testimony to Congress.
The regional manager, who wasn’t identified by the inspector general, overturned a draft audit conclusion that Boeing shouldn’t be paid anything because the company was in “potential violation of accounting standards,” Heddell said.”
As with anyone or and company charged with anything in the US, they are innocent until proven guilty. Don’t you agree?
Aero Ninja; “And of course we have this kind of transparency: http://seekingalpha.com/article/277504-how-profitable-is-boeing-s-787-dreamliner-not-very”
Only time will tell how true, or untrue this investorment opinion is. Meanwhile Boeing’s stock seems to be doing just fine.
http://finance.yahoo.com/q?s=BA&ql=0
But, I think we getting to far away from the AA order, which this thread is all about, not the financial situation of the B-787 program (unless AA is considering more B-787s as part of this order, which I doubt).
It would be better on an A380. Which just goes to show that this is a meaningless metric. But even so, how many 757s do they need then, compared to how many they have? They had 124 in July 2010, according to their website. For the routes you mention they need how many? 25? 50? What do the other 100/75 do that only the 757 can do and that justifies the gas-guzzling?
It is a meaningful metric when all variables are added. Fleet flexibility, etc. are important as well. There is a balance between many different variables.
Fleet acquisition (even if a deal is good) still costs a lot more than a plane which is owned and/or amortized. There is a reason why DL is flying its old “gas guzzlers”.
I see no reason why AA can’t hold on to a number of its B757’s until Boeing has a plane which addresses the market. If Boeing fails to, then AA would probably be smart to get the A321NEO.
Thanks for agreeing with me that by itself CASM is a meaningless metric.
There is also a reason why both AA and DL are in the market to replace these gas-guzzlers (and there is no need to put quotes around it – it’s a fitting term). A plane which is owned/amortised and eats you with operating cost is only cheaper if you can not get a good financing deal. With current interest rates, and very considerable volumes of credit available for good clients, while at the same time it is clear that fuel cost will remain high (and may rise further) for the future, now is the time to let go of the view you espouse, and replace fleets.
I see a lot of reasons why AA may not want to hold on to 757s for any longer than they have to. And they have to until 2016, not 2020. A re-engined 737 or A321NEO will earn them tons of money in those four years, by improving their competitiveness. Why wait?
“Thanks for agreeing with me that by itself CASM is a meaningless metric.”
..and? Need to feel like a sycophant (so Jacobin777 says in a very sardonic tone)? Anyone who posts here knows CASM is just one of a multitude of variables and CASM itself is a relative parameter…
AA’s credit ratings are horrible so we aren’t exactly sure your “if” (regarding credit) isn’t too valid (though AA will probably be given a good financing rate given what is at stake-but we don’t know).
You are the one who said “Their newest B757′s are the best planes for the routes they fly. The CASM on a B757 is excellent for TPAC, Hawaii and “deep” South American routes.”. Next time don’t make simplistic statements if you don’t want to be called on them.
AA’s credit ratings may not matter so much if they go through vendor finance, and that is what is being mooted here. It’s really quite simple – they are in a massive hole, with half their fleet gas-guzzlers (sorry, say what you want about how great the 757 is, there are better ways of flying 182 people around), and no money to do anything about it. So whoever can help them best with dealing with this problem will get the deal.
Does everything need to be spelled out? One would hope common sense would dictate. As I stated before, people who post on this board know CASM is a relative parameter.
If B757’s were “gas guzzlers” as you state them, they would probably retired “en masse” yet we don’t see that. Older B757’s are obviously going to be retired due to high cycles, cost of c/d-checks, etc.
They’re not being retired because either the operators have no cash, or they serve a unique purpose for which there is no replacement. Where neither of these causes held, they have been retired (e.g. BA). The cash issue is being addressed it appears in the case of AA, and the unique purpose will disappear when the A321NEO shows up. Expect mass retirements/freighter conversions post 2015, even of relatively new frames. We both agree that the MD-80s are gas-guzzlers, I hope. Yet they still fly and aren’t being retired on an accelerated schedule, even though more efficient aircraft are around. Life’s never that simple.