United to Buy 128 Boeing Jets for $22 Billion
United Airlines announced Monday that it will buy up to 128 new widebody planes from Boeing Co. for a total of $22 billion, making it the largest order ever for new commercial aircraft.
The purchase agreement, which would make United the first buyer of the new Boeing 777 jetliner, carries potentially large implications for both the commercial airline and aircraft building industries. United, emerging from a failed bid by its unions to take over the carrier, seeks to expand its fleet of older and smaller planes to better compete with its fast-growing rival, American Airlines. At the same time, industry-leader Boeing gets a major boost in its intense competition with rival jet makers McDonnell Douglas Corp. and the European consortium Airbus Industrie.
United said the Boeing 777 will ultimately replace its McDonnell Douglas DC-10s. In choosing the Boeing aircraft, United passed over the Douglas MD-11, a modern version of the DC-10 upon which Douglas has pinned its hope for financial recovery.
The loss of the United order was not a surprise to McDonnell Douglas officials, who said the company has an extensive backlog of orders for the MD-11, which is being built in Long Beach.
The size of United’s order surpassed its then record-breaking April, 1990, order for up to $15.74-billion worth of narrowbody planes. That entire order also went to Boeing.
The total price of United’s record-breaking order is adjusted for inflation over the life of the contract. In current dollars, the order looks smaller. Based on aircraft prices provided by Boeing, United’s orders and options are worth $16 billion. Analysts say United may be paying even less than that because manufacturers frequently give discounts for large orders.
The aircraft will be delivered from 1995 through 2001.
At a press conference in Chicago, the chairman of parent UAL Corp. seized the opportunity to indicate that United’s takeover struggle was over, and that it was ready to concentrate on expansion.
Chairman Stephen M. Wolf called the purchase an “absolute milestone in the history of the company” that would transform United into “the world’s best airline.”
United delayed plans to order badly needed widebody aircraft last July, as its unions prepared a takeover offer for the company. The unions had hoped to use a big aircraft order as a carrot to entice much-needed financial support from aircraft suppliers.
But the drawn-out union effort to buy United collapsed last week.
Industry analysts said the sheer size of the order all but rules out a union buyout any time soon. “This was one big potential source for financing a deal, and now its gone,” said Thomas Longman, an airline industry analyst with the New York investment firm Bear Stearns & Co.
The unions, whose members include pilots, mechanics and flight attendants, have said they intend to continue to pursue employee ownership. Nonetheless, the pilots on Monday welcomed the aircraft order, which is bound to create new jobs at United.
“We’re delighted,” said pilot spokesman James Hanson. “Our (buyout) effort called for expansion, and this fits right in with our plans.”
Meanwhile, Frank Shrontz, Boeing’s chairman and chief executive officer, said in a statement Monday: “The importance of today’s commitment for Boeing cannot be overstated.”
Boeing will build the 777--designed to fill a market niche between the 747-400 and the existing 767-300 widebody--at its Everett, Wash., plant north of Seattle. It now has about 3,400 employees working on the plane.
Company officials said the 777 program will eventually call for up to 10,000 jobs, some of which will be filled from elsewhere within Boeing.
The Boeing 777 is an aircraft with an unusual design--it comes with folding wingtips--and a controversial history. It was conceived as a venture between Boeing and three Japanese equipment makers, but an outburst of protectionist sentiment in Washington earlier this year forced the Japanese to accept a role as suppliers rather than equity partners.
United on Monday ordered 34 Boeing 777s, which seat 363 passengers, and placed options for 34 more. The carrier also ordered 30 long-range Boeing 747-400s, which seat up to 448, and placed options for an additional 30.
Wolf declined to say how United would pay for the aircraft, but indicated that the airline’s unions would not be asked for concessions to finance the purchase. He said, however, that he may seek productivity improvements from employees to offset rising operating costs.
Wolf declined to provide earnings projections for United, but said analysts’ predictions for industry-wide losses in the fourth quarter are “not out of line.” Analysts expect the industry to lose money during the last three months of 1990 because of high jet fuel costs and a slump in travel. They expect UAL, for all of 1990, to earn half its 1989 profit of $324.2 million.
United is negotiating contracts with its unions, a process that promises to be drawn-out and difficult. The unions, in an unusual display of cooperation, will meet Wednesday to discuss joint bargaining strategy. The pilots have already said they expect “industry-leading” raises.
On Monday, Wolf would say only that he “anticipated raises” for the three unions. “In fact, we’re counting on it.”
In his first public statements since the failed union buyout, he said he felt comfortable with his relationship with employees.
“I feel absolutely fine about working with the employees,” he said. “Frankly, I think they are quite pleased with the way we are moving forward.” The unions intended to replace Wolf if they had acquired the company.
Airline industry analysts said the purchase will go a long way toward helping United catch up with archrival American. United has 457 aircraft in its fleet, compared to American’s 541. Considering the hundreds of aircraft both airlines have on order, United will still come up 15 planes short.
A lack of widebody aircraft has hurt United, especially in the fast-growing Pacific region where it hasn’t had enough planes to expand. It has authority to fly to many destinations, such as between Los Angeles and Hong Kong, but lacks the aircraft to do so.
Shryer reported from Chicago and Gellene from Los Angeles.
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