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July 13, 2011 / oneworld82

Airbus or Boeing? American Airlines dilemma

When the news came out of American Airlines intention of putting together an order for 200 new narrow body airplanes, many observers were skeptical. How could a company who has been losing market share in the past few years (and that has been in red for countless time now, with only reportedly 1.5b USD in cash on hand) want to place such a big order? Yet, it makes perfect sense.

Whoever flew American Airlines on a domestic flight recently, knows that one of the main problems crippling AA and its fully-owned subsidiary American Eagle is the age of its planes. Old, tired MD-81/82 and B757 still carry thousands of passengers every day on short and medium haul routes like Miami – Boston and ORD – SFO. Comfort of the passengers aside, though, the problem lies in the inefficiencies that these planes carry with themselves. With an average age rounding 20 years, continuous maintainance is necessary, spiking up costs and causing costly delays (especially in wintertime).
Another thing to consider: as the standard airplane is depreciated over 25 years, these planes risk to become a serious liability on AA’s balance sheet as soon as 2015-16. No wonder then that American wants to modernize its fleet to become more fuel efficient and to save money that could help the glorious company become profitable again.

Now, the fun part begins. While American Airlines signed an exclusivity agreement with Boeing in the ’90s, this agreement is expired now. As the only major full-service airline (Southwest forgive us) running only on a fleet of Boeing, American Airlines is in the (sweet) position to try to get a bargain from Airbus, the Boeing’s European rival all-too eager to get another foothold in the lucrative US market. And apparently Airbus is really eager to offer preferential service, fantastic loan conditions, and other perks to American if what has been dubbed one of the biggest deals in the aviation industry’s history goes through.

And what is Boeing doing? Well, the negotiations made the Chicago, IL-based company fall from the sky. Not expecting it, the company is scrambling to put together a counter-proposal attractive enough for American not to switch, at least partially, to its arch-rival.

Yet, it seems a hard battle against time for Boeing. American Airlines seems to have all the interests in accepting the succulent offer that Airbus put on top on the shelf. First of all, it will get a fleet of modern, more efficient (when compared to 737s) A320s, including the new NEOs that can save around 15% of gas – not a small feat giving the high fuel price these days. Second, the financing options are very attractive and Airbus would help the company train AA’s pilots and giving extra help in plane mantainance, easing up the transition for American Airlines. Furthermore, AA would diversify its portfolio and have more bargaining power over the two companies in the future, more so if we count the future entrance of Bombardier in the medium weight planes segment. Diversifying its portfolio would also streamline operations and reduce costs since this hefty order would include only A320s (for now, at least), a plane which is mainstream and easily mantainable nowadays. Plus, the 6b financial deal that Airbus put together seems really too-good-to-be-true for cash-strapped AA.

Of course, it is possible that in the end the board will decide to split the order to maintain good rapport with Boeing; but in the end, the threat for Boeing is big. Airbus could start from A320s today, and go on with A350s and A380s tomorrow.
In any case, even a partial deal with Airbus would mean a huge victory for the European company and a big blow for the Chicago-based Boeing.

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