American Airlines May Trim Options on New Airplanes : Transportation: The company says it is cutting its equipment purchases by at least $500 million. Analysts say it could be the start of an industry trend.
Citing persistent airline industry turbulence, American Airlines said Wednesday that it is trimming its budget for new equipment purchases by at least $500 million over the next five years and may allow options to purchase new airplanes to lapse.
Although the planned budget cuts represent just 2% of American’s five-year, $21-billion new equipment budget, some industry analysts immediately interpreted the move as the first sign of a new wave of cutbacks in equipment purchases throughout the domestic airline industry, an industry where more than 25% of the carriers are in or near bankruptcy.
“This is just an early glimpse, the tip of the iceberg, of what will be coming,” said Morton Beyer of Avmark, a Reston, Va.-based airline market research firm. “There is going to be lots more cuts in capital spending coming.”
Wall Street investors apparently agreed. Shares of the nation’s two largest airline manufacturers, Boeing and McDonnell Douglas, fell in active trading Wednesday after American Airlines Chairman Robert L. Crandall told a group of New York analysts of the planned cutbacks. In composite trading on the New York Stock Exchange, Boeing lost $1.25 to close at $49.875, while McDonnell Douglas fell $2 to close at $54.125.
Crandall told analysts that escalating costs caused in large part by increased governmental regulations coupled with ongoing fare wars have put such such a squeeze on profits that American must step back a bit from the ambitious, five-year $21-billion modernization program announced last year. He said that the airline has already decided not to purchase about $400 million worth of ground equipment in 1992 and 1993. In addition, he said another $100 million worth of unidentified equipment would not be purchased over the next five years.
More importantly, however, Crandall said additional equipment spending cuts would be made in the upcoming weeks as the airline reviews its “aircraft related” purchasing plans.
An American spokesman said the airline has 182 “firm orders” for delivery of new aircraft between 1991 and 1995 and that these orders would not be affected by the ongoing review. However, he said that the carrier’s options to purchase an additional 209 aircraft would be carefully studied in light of the continuing pressure on profits and the uncertain economy. Of American’s 209 options, 53 are for Boeing planes, 81 are McDonnell-Douglas planes and 75 are for new craft built by the Dutch manufacturer Fokker.
“We haven’t heard anything from American,” a McDonnell Douglas spokesman said. “We feel strong that our order book is firm. . . . We believe things will take care of themselves.”
Representatives of United and Delta airlines, the two other large and healthy domestic carriers, said they have no plans to reduce new equipment purchases, defer delivery of planes or allow purchase options for new planes to lapse. United has 259 planes on order and options to order an additional 270 aircraft. Delta has 196 planes on order and options for an additional 287 aircraft.
John Pincavage, an analyst with the Transportation Group in New York, downplayed the importance of Crandall’s remarks, arguing that the executive is simply bringing the airline’s equipment budget in line with reality and positioning himself for some tough price bargaining with airline manufacturers.
Airline Orders Aircraft on order and option from U.S. air carriers as of Dec. 31, 1990.
Firm Manufacturer Orders Options Airbus 230 112 Boeing 763 862 Fokker 95 75 McDonnell Douglas 236 375 TOTAL 1,324 1,424
Source: American Transport Assn.