Strategically speaking, why American Airlines?

Update, 11:30am PDT July 25: The Ft. Worth Star-Telegram summarizes the delivery schedule of the huge AA order. Of particular note: AA doesn’t receive its first 737RE until 2018. This raises the question: is the EIS of the 737RE not until 2018? Or is AA truly not the “launch operator” of the 737RE (we wonder what a certain UK person would have to say about this)?

Original Post:

Wells Fargo issued a note today in which one small segment said:

“One curiosity about Airbus’s and Boeing’s aggressive marketing campaigns to replace AA’s narrow-bodies is the extent to which the manufacturers appear to have cut deals for one of the least profitable airlines in the world.

“We understand the “strategic” importance of AA, but according to consensus estimates AA is not expected to generate any profit until after 2013. Meanwhile, healthier airlines (see Delta, Ryanair, and Southwest above) are also looking at major re-fleeting plans and no doubt will pursue comparably attractive pricing and financing terms.”

The conventional wisdom is that Airbus wanted to penetrate American and brake the Boeing exclusivity, and this is certainly true. We have a broader take.

A key strategic objective was, in our view, forcing Boeing to re-engine rather than go with a new airplane.

Key Boeing personnel had earlier this year told investors’ days and Wall Street analysts that one of their objectives was to wait long enough for Airbus to be irrevocably committed to the NEO program and then spring a trap with the New Small Airplane that would dramatically eclipse the NEO.

It did not, of course, take very long for this to leak out inasmuch as analysts like to write about these things. We reported the reporting, so Airbus clearly understood Boeing’s thinking.

How real the thinking was, or whether it was just bravado, is something that only Boeing could say. But if Boeing could pull off the NSA, Airbus might very well have been in danger of having an obsolete product before it ever flew.

Reuters had this story in which it touched on this very point.

So Airbus had to do what it could to force Boeing’s hand.

John Leahy, COO-Customers for Airbus, predicted all along Boeing’s NSA would not be built and that if a US Boeing operator defected to the NEO, Boeing would re-engine the 737. Re-engining the 737 would make the NSA stillborn, for now.

And this is exactly what happened. Boeing Commercial Airplanes CEO Jim Albaugh says the NSA has now been pushed out to the second half of the next decade, and Airbus officials were strutting that they had forced Boeing into the RE–a view largely held by the aerospace analysts and other observers.

Or is that what’s happened? One source close to the situation says it’s not beyond the realm of possibility that Boeing could pull a rabbit out of the hat and forego the RE in favor of the NSA for American. We think Heaven and Earth would have to move, but stranger things have happened.

Two sources with direct knowledge of the competition tell us Boeing was offering the NSA right up until Tuesday night when time ran out and the RE became the default. Albaugh said the next day at the press conference that Boeing could not figure out how to build a composite NSA at the rate of 40-60 a month, and indeed the lack of composite production capacity is something we wrote about months and months ago–not the technological challenges of the NSA itself.

But getting back to the point of this post, strategically forcing Boeing into the RE was probably more important than the AA order. And for this, Airbus’ Leahy probably is going to be the most influential person in commercial aviation this year.

25 Comments on “Strategically speaking, why American Airlines?

  1. Airbus wrote about the lack of industrial scale composite fuselage barrel production capacity in re the 787, in, what, 2007? Nothing has changed…

  2. Leeham :
    Two sources with direct knowledge of the competition tell us Boeing was offering the NSA right up until Tuesday night when time ran out

    And then the next day Albaugh said at the press conference that the “production system is not understood” for the 737 replacement. So what were they offering?

    Leeham :
    Boeing could pull a rabbit out of the hat and forego the RE in favor of the NSA for American

    While they are at it, why not pull 787-9, 787-10, 777NG and the Tanker out of the same hat?

    Leeham :

    one of their objectives was to wait long enough for Airbus to be irrevocably committed to the NEO program and then spring a trap with the New Small Airplane

    And yet when they faced the possibility of losing a key customer, they put all their cunning plans/traps into a trashcan and went with an RE. Well, I hope somebody will get a bonus for that this year… cunning indeed.

  3. Kudos to Leahy on this one. Too bad Boeing have screwed up so miserably on the B787 program so far that it has hindered other products.

    More than the NSA, my bigger concern is what is Boeing to do regarding the A359…it has been eating the B77E’s lunch. That being said, a B787-10 would be an excellent A333 replacement (and it seems more and more carriers are preferring the latest iteration of the A333 over the B77E).

    Also, with more specs about the -1000XWB coming out, Boeing needs to address that particular market as well.

  4. The RE-program will give Boeing early cash flow and limited chance to mess something up. An NSA without doing re-engine before would have effectively stalled the B737 line to the end of the decade and Boeing would surely have messed the start-up.

    And by the way: RE is cheap, they can still do NSA in 2023. Talk of Boeing representatives isn’t worth anything any more.

  5. So, what was AA’s incentive to go with the A-320NEO, and the B-737NG/NE? The B-737NE is not going to be delivered until 2018 and the NSA would have had an EIS of 2019? The incentive from Airbus to accept the NEO beginning in 2016 (or whenever they promised delivery slots, at the cost of who?), with the NSA just 3 years away (before the AA orders) must have been not only in special financing for AA, but in the actual sales price per unit from Airbus. In other words, Airbus wanted the AA order, and to force Boeing into the direction they wanted them to go that the NB airplanes AA is getting from them are at a very significant loss.

    This only makes sense when you consider how AA does business. AA is loyal only to the bottom line, not to the OEMs. Both Airbus and Boeing know this, and apparently both only cared about getting the order at any costs.

    So strategicly, Airbus got their foot into a major carrier in the US, other than those who they essentially ‘owned’ anyway (US and the old UA). They also get to force Boeing into a NB new engine “fly-off” they believe they can win with CASM.

    But can they? CFM is now offering a newer version of the LEAP engine to an OEM who already builds all competing B-737NG designs that have up to a 10,000 lb OEW advantage over each one’s direct A-320 series model.

    Airbus is doing nothing to the wings of the NEO models, except strenghting the wing to take the heavier engines, as well as the sharklets. Boeing, OTOH has little to no wing strenghtening needed on the B-737NG, and it already has winglets. The biggest time consumer in the B-737NE project is the engine developement, there appears to be a lot less engineering design work needed design work needed to the airplane itself, other than so internal wing work, engine attachment, strut, and cowling, and maybe some additional teaks here and there.

    Airbus should be careful what they wish for…..they just might get it.

    There are (at least) two more major refleet orders coming in the next 12-18 months, DL and the new UA. Boeing now has seen the writing on Airbus’s wall. Will they make the same missteps with these orders, or play Airbus to their weakness, let them win these orders, too, but at a significant loss. Both DL and UA watched the AA order process very closely and demand significant savings in purchases, leases and operating costs.

  6. I have a slightly different take. Re-engining was a low risk option for both Airbus and Boeing. If Boeing had done the RSA, the backlog cushion of NEO orders would have allowed Airbus to introduce their own RSA a few years after Boeing.

    Consequently, the RSA was a higher risk option for Boeing. Ultimately they weren’t able to get the numbers to add up and they would have been left with a gap between the decline of the original 737 and the ramp up of the new plane. A gap that risked becoming a chasm if the accelerated program didn’t run smoothly (pace 787).

    But I think there was a strong element of panic at Boeing over the potential complete loss of AA to Airbus. In principle the other objections could have been dealt with in an orderly way. regardless of AA. With the large number of options added to the main order, Airbus could supply all of AA’s needs. They didn’t need to order from Boeing. I can imagine McNerney ordering “Do what it takes!” The re-engine is what it took.

    • Could it be that AA has a penalty free “walk away” clause in their purchase order with Boeing? If the 737RE does not come to pass or does not live up to expectations or has large delays (due to offering a product that is not yet actually a product!), then AA gets to walk away, gets their deposit back (assuming they even paid one) and exercises all or part of that huge set of options for the Airbus order.

      That could explain why the complete order, including options, is so large.

      • Do they need something similar? The order can’t be firm because the plane is no officially lauched

  7. Well done airbus you have outsmarted mcboeing now go for DL & the new UA and then to rub the salt into mcboeing wounds set up a line in the good old U.S.A and show mcboeing how to build 21st century aircraft the euro way.O by the way don’t forget airbus spends 100 millon dollers a year in the GOOD OLD U.S.A.on part’s.

  8. Boeing does understand one fundamental — defending a point of market share is 10 times less costly than regaining it once it is lost. Airbus forced their hand with the neo by threatening a clean sweep of key Boeing customers — AA followed by DL followed by UA. Boeing couldn’t sit by an lose all of the order (as that would have meant a new production line in Mobile dedicated to ex-Boeing customers) and was forced to offer re-engining to at least salvage half and become more competitive in the other campaigns. Boeing has lost their former mantle of leadership, and have truly become McBoeing, reacting to Airbus rather than beating them with a better aircraft.

  9. Just as Airbus decided to go for the NEO as they don’t have the resources for anything new, Boeing does not have the resources to go for the NSA either and can only afford re-engine. And I am under the impression that Boeing is even deeper in the s%^t with resource availability than Airbus. Anyone who claims that either of the two is able to pull a new narrowbody out of the hat is dreaming.

    BTW: Did GE/CFM just overcommit themselves on the LEAP-X? The P&W GTF is running in various forms including at least 2 engines actually flying, while GE/CFM won a large number A32x orders based on a relatively big paper (powerpoint?) overhaul which has not yet been built and now they seems to have themselves committed to a brand new version for 737RE which seems to deviate quite a bit from the A32x engine.

    • @AngMoh:

      So you mean with Boeing finishing up its major work B787 and with the B747 completed they have less resources than say Airbus which have recently stated they need to pull resources to get their A359XWB out as soon as possible?

      • The 787-8 has loads of manufacturing related work left. The 787-9 is a 787 v2.0 according to Boeing themselves and as such has loads of redesign work to do. The 797-10 needs to be converted from Powerpoint to plane. The Tanker ™ is only getting started. This is about the same load of work as A350-800/900/1000. Then Boeing needs to get into the 777 so that makes their resource problem bigger than those of Airbus. And I don’t imply that Airbus does not have problems… Both need to let brand new narrowbodies fly away.

  10. Airbus has communicated consistently they found out no game changing technology would be availabe untill the second half of the next decade. The state of the art is well known by all parties. The only game changing technology available for 2015 are new engines. And those fitted under the A320 series. Airbus decided to do so irrespective of Boeing ideas mainly because the CSeries poses a credible theath from below and because of the expected additional sales. PW and CFMI were pushing / financing the upgrade, which helped.

    I guess the bigger picture is that (nearly washed away) PW finally got the GTF right after >20 years and that made everyone move in the end. (Bombardier, GE/Snecma, Airbus, the airlines, Boeing). A good plot for a book / movie in a few years..

  11. If I recall correctly, the Boeing statement wasn’t about lack of clarity regarding “composite” production… it was concerned about production using a “new material” (or words to that effect). I know they sniffed around the fibre-metal laminates world a few years ago – even recruited a couple of people – so maybe they’re looking at using GLARE or another type of FML for their NSA…

  12. FF. I replied to your comment #6. It is behind your comment.

    Regards,
    John

  13. jacobin777 :@AngMoh:
    So you mean with Boeing finishing up its major work B787 and with the B747 completed they have less resources than say Airbus which have recently stated they need to pull resources to get their A359XWB out as soon as possible?

    Perhaps you should read Flighblogger’s latest post before claiming that Boeing is finishing up its major 787 work. And since the 747-8 is supposed to be a mod of a legacy program, theoretically there shouldn’t be that many resources to be freed up.

    But to be honest, I do see one possible way where Boeing could have a resource problem. Since the real 787 work was all supposed to be done by outside companies, it could be that Boeing did not ramp up their own staff for the program. That could possibly mean that what Boeing now has in abundance is a whole bunch of engineers who are good (arguably) at monitoring the work of others but not necessarily able to do the work themselves.

    Just a theory. I also believe Airbus could be in a similar cycle.

  14. jacobin777 :@AngMoh:
    So you mean with Boeing finishing up its major work B787 and with the B747 completed they have less resources than say Airbus which have recently stated they need to pull resources to get their A359XWB out as soon as possible?

    You keep saying that, but all the evidence is against you. Flightblogger is reporting a delay to the 787-9. Rampup of the 787-8 is not progressing as planned. If Airbus’ claims hold true, it will deliver the A350-900 before the first 787-9 (how credible that is is another question). But regardless, how does this lead you to conclude that Boeing will have more free resources than Airbus?

    Please explain.

    • There is no “evidence” against me.

      Boeing’s delay for the B789 are a multitude of factors. but the production/manufacturing-side is where the majority of delays are, not the engineering side. Yes there are some delays here as well, but as aspireaviation reported, engineering on the B789 side is doing well (from what I’ve been able to put together).

      Also, I mentioned the B748 program. Again, from an engineering standpoint, most of the work is completed. Once again, freeing up vital resources.

      Maybe we’ll know more tomorrow when Boeing releases its earnings, but Boeing hasn’t stated (recently) that it needs to pull engineers, resources, etc. from other programs for ramping up B787 production.

      Regarding the A350 ramp up, forget about that. They first need to get the A359XWB built/tested/flying and they have stated they need to pull resources for this.

      Regards..

  15. Let us look at who is doing what, shall we. Big B is working on the 7late7-still, 747-8 and now the 737re, maybe plus the Tanker. That would be four major projects, more or less. The Busboys are in with the A320/21NEOs, A350s and what else, as the A400 is in flight test and the A380-8 is more or less in production. So who would have recourses for a new project? Hum. Looks to me that maybe Big B is a little thin on resources for a totally new aircraft, but I could be wrong. I also think they are wondering about some of the decisions made on the 787 also, which would explain the statement about industrial processes on the NSA.

      • The comment is predicated on the fact that large aircraft require customization for fleets, this in mostly interior work. Oh I also forgot about the 4 or is 6 new 747s for the Whitehouse. I assume they will also be 747-8s, however I don’t know that. These aircraft will require a full time design team until completed.

  16. KC135TopBoom :
    […]
    Airbus is doing nothing to the wings of the NEO models, except strenghting the wing to take the heavier engines, as well as the sharklets. Boeing, OTOH has little to no wing strenghtening needed on the B-737NG, and it already has winglets. The biggest time consumer in the B-737NE project is the engine developement, there appears to be a lot less engineering design work needed design work needed to the airplane itself, other than so internal wing work, engine attachment, strut, and cowling, and maybe some additional teaks here and there.

    So let me get this right.

    1/ Airbus is doing nothing on the wing, but adding sharklets Boeing already does.
    So Airbus is adding performance to the wing, but Boeing is not (as it already did so years ago to close/create a gap with the legacy A32x).
    a/ You think that the RE will be “more performant” than the NEO ? Shouldn’t it be the exact opposite ?
    b/ The sharklets option is already done, development wise.

    2/ Airbus is doing nothing on the wing, but strenghten it to fit a heavier engine, but Boeing don’t have to do the same ?
    Explain to us why Boeing shouldn’t need to do the exact same thing ? The engine is going to be virtually the same between the two, so why would one need to strenghten a wing, while the other wouldn’t ?
    Or maybe it’s the “some additional tweaks here and there” you are refering about ?

    The bottom line is:
    – Airbus is going to benefit from a more efficient engine than Boeing (fan size)
    – Airbus is going to improve the aerodynamic of the wing while Boeing will not.
    In the end, the performance improvements to the 320 by going NEO should be more important than for the 737 by going RE.
    (After that it’ll depends how you view things, either expand the gap or close/create the gap …)

  17. UKair :

    Leeham :
    Two sources with direct knowledge of the competition tell us Boeing was offering the NSA right up until Tuesday night when time ran out

    And then the next day Albaugh said at the press conference that the “production system is not understood” for the 737 replacement. So what were they offering?

    The same hot-air when they were flogging 787s with May 2008 EIS and at a price less than the 737’s list.

  18. While all the evidence now confirms that an all new 737 would have
    been a much better airplane than the A320NEO and scared the hell
    out of Mr. John Leahy at Airbus, the troubles at Boeing with the 787
    and 747-8, neither of which may ever recover their development
    costs, the late delivery at AA and who knows how many other airlines
    and the need to “redo” the 777 to fight the A350, just to name a few
    big issues, forced Boeing to go for the “second best and only” solution
    in a hurry, to avoid leaving part or all of the 737 market to Airbus, the
    C-series and a few others!

    I am confident, that the 737RE will compete effectively with the NEO,
    because:
    1. it will continue to benefit from a lighter structure, as well as the
    associated smaller-diameter and thus smaller/lighter engine,
    2, it has a huge customer base and together with the fact that Airbus
    is now also “stuck” with their NEO way into the next decade and
    3. Airbus cannot handle all the business in this category anyway!

    I am not an expert on certification, but I assume grand-farthering
    previous certification processes of “the old buggy,” should NOT
    cause too many problems, also because of the fact that there will
    only be minor structural changes made to the wing primarily, com-
    pared to what they would have been, for hanging the larger, but not
    required greater thrust NE, on the existing 737airframe.

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