McDonnell Douglas May Land Gigantic Jet Order : American Airlines Reportedly Negotiating $7.4-Billion Deal for Up to 160 Aircraft
American Airlines is negotiating with McDonnell Douglas to make one of the largest purchases of airliners in history, a potential order for up to 160 narrow- and wide-body aircraft worth an estimated $7.4 billion, industry sources said Tuesday.
If the order occurs, it would rank as the largest order ever placed to one aircraft manufacturer. Delta Airlines placed a larger order recently but split it between two plane builders.
The American Airlines order would provide an enormous boost to the financial fortunes of the Douglas Aircraft unit in Long Beach but would not likely add to employment levels at Douglas.
American acknowledged that it has been negotiating for an aircraft purchase but denied that it has reached any final decision with McDonnell Douglas. Such a decision would require the approval of American’s board of directors.
McDonnell Douglas spokesman Don Hanson acknowledged that negotiations with American have been under way but declined to comment on whether a deal is at hand. American is already the world’s largest operator of McDonnell Douglas jetliners.
An enormous deal between McDonnell and American has been rumored for weeks within the aircraft marketing industry and among securities analysts. The reports are regarded as credible because American has long delayed committing itself to a large order for replacement of older jets and expansion for new routes.
“We have been saying for a couple of weeks they were going to do this,” said Paul Turk, an official of Avmark Worldwide Aviation Marketing & Management Service, a consulting firm in Arlington, Va.
Edmund S. Greenslet, who heads the consulting firm ESG Aviation Services in Connecticut, added: “The word that we are getting is that the deal is going through for the MD-11s and that the only holdup is the final trimming on the MD-80 portion of the order.”
Nonetheless, American spokesman Alton Becker asserted: “We have not made any decisions. We have not signed any contracts. We have not made any deals. No announcements are imminent. Now it is possible that within the next few weeks we will have something of more substance to say about the issue of aircraft. Now, it is highly speculative.”
Spokesmen for Airbus Industrie and Boeing, the non-Communist world’s other major manufacturers of commercial airliners, said their firms are also negotiating with American.
Under the reported deal, American would place an order and take options for as many as 60 MD-11 wide-body jets, worth $90 million to $110 million each, and 100 narrow-body MD-80s, worth about $25 million each.
The MD-11 is a derivative of McDonnell Douglas’ veteran three-engine DC-10 and is expected to make its maiden flight in late April. Deliveries of the aircraft would begin after government certification of the new jet, which is expected in the spring of 1990.
A number of aerospace analysts and industry experts, however, warned that the number of firm orders in the American deal may be relatively small and that most of the orders would be conditional.
Greenslet said that of the MD-11 orders, “5 or 10 or 15 will be firm orders, and the rest will be options.” He said no more than 20 of the 100 MD-80s will be firm orders and that the other 80 will be options.
Jack Modzelewski, an analyst at the New York investment firm of Paine Webber, said at least some of the orders in the American Airlines deal may involve assuming nine orders and options that British Airways has dropped. Those reportedly would be among the earliest MD-11s to come off the assembly line.
“I don’t think the deal is as good (for McDonnell Douglas) as it looks on the surface,” Modzelewski said. “On the other hand, it is not as bad as some people suggest. The truth lies somewhere in between.”
Even without the order by American, which is based in the Dallas suburb of Grapevine, McDonnell Douglas has had such an enormous success in selling aircraft over the past year that its production capacity is essentially sold out through 1992 and well into 1993, Hanson said.
McDonnell has booked orders and options for 250 MD-11s worth $25 billion. But only 88 of the aircraft are covered by firm order agreements. Similarly, it has booked orders and options for 785 MD-80 jetliners worth about $20 billion, but only 346 are on firm order.
If the American order does occur, it would not necessarily have any effect on employment at Long Beach because the company does not expect to increase its production rates. Douglas plans to produce one MD-11 per week, and it is currently increasing production of MD-80s to 2.5 per week.
In a recent interview, Glenn Hickerson, Douglas vice president for commercial marketing international, observed that boosting the production rate is limited by the physical capacity of the Long Beach plant and the potential for problems if production increases too much.
“When we got to a higher rate in the late 1960s, we got into problems,” he observed. “In addition, the MD-80 is a bigger and more sophisticated airplane (than its DC-9 predecessor). You just cannot turn out as many on the same amount of real estate.”
Concern Over Quality
The company has already encountered production delays and other problems in its expansion over the past five years, when it went from a work force of 14,000 to more than 38,000 today. In addition to internal production problems, vendors have been late in delivering parts.
“Our hope continues to be that the manufacturers don’t increase their production rates so their quality doesn’t suffer,” said Louis L. Gonda, executive vice president at the Beverly Hill-based aircraft leasing firm International Lease Finance Corp. “We don’t need any more safety issues.”
Turk of Avmark said American, by placing many options rather than firm orders, could tie up delivery positions so that even if they do not actually buy the planes, they can make a profit by selling those delivery positions.
RECENT DEALS FOR COMMERCIAL AIRCRAFT
BUYERS MANUFACTURERS VALUE DATE 1. Delta Air McDonnell $6.0 billion (est.) Sept. 22, 1988 Lines Douglas Boeing 4.0 billion (est.) 2. Int’l Lease Boeing 4.6 billion May 23, 1988 Finance (Beverly Hills) 3. Braniff Airbus 3.5 billion Jan. 4, 1989 Industrie 4. Northwest Airlines Airbus 2.5 billion April 3, 1987 Industrie 5. United Boeing 2.0 billion May 26, 1988 Airlines 6. American Boeing 2.0 billion May 25, 1988 Airlines 7. Air France Boeing 2.0 billion Jan. 15, 1987 8. Korean Airlines Boeing 1.5 billion April 14, 1988 9. Scandinavian McDonnell 1.5 billion June 13, 1987 Airline System Douglas 10. Ansett Worldwide Boeing 1.0 billion Nov. 16, 1988 Aviation (Australia) 11. Ansett Transport Boeing 850 million Oct. 8, 1987 Industries 12. America West Boeing 800 million Dec. 13, 1988 Airlines 13. British Boeing 795 million Aug. 14, 1987 Airways 14. Quantas Boeing 675 million March 2, 1987 Airways Ltd. 15. Swissair McDonnell 650 million March 19, 1987 Douglas
