American, Boeing in Jet Deal
American Airlines, again staking new ground in commercial aviation, said Thursday that Boeing Co. will be its sole supplier of jetliners for the next 20 years and will provide the airline whatever models of jets it needs.
The novel pact not only will enable American to replace its current fleet, it will also give the airline exceptional flexibility to reconfigure its fleet among small, medium and large planes as conditions in the airline market change.
Boeing is also a big winner, capturing one of the biggest customers available well into the next century. American, based at the Dallas/Fort Worth International Airport, is the nation’s second-largest airline, behind United.
The deal is a stinging blow to Boeing’s two main rivals, Airbus Industrie of Europe and the already struggling Douglas Aircraft in Long Beach, whose planes account for nearly half of the 640 aircraft currently flown by American.
The American fleet now includes 260 of Douglas’ narrow-body MD-80 jetliners, but the Boeing deal probably means they’ll all eventually be replaced with Boeing 737s.
The shutout at American follows Delta Air Lines’ decision earlier this month to eliminate Douglas as a contender to replace Delta’s aging fleet of L-1011 widebody jets. It also points up the clear advantage Seattle-based Boeing has in being able to offer a complete family of jetliners.
Douglas’ parent company, McDonnell Douglas Corp., at one time hoped to expand Douglas’ product line to better compete. But last month McDonnell announced that it had abandoned the effort because of the staggering $15-billion investment it would have required.
The American-Boeing pact, which is subject to Americans’ pilots approving a new labor contract, calls for American to start with a firm order for 103 planes--including 12 of Boeing’s new 777 wide-bodies--valued at about $6 billion.
American also obtained “purchase rights” to buy an additional 527 airplanes over the next two decades, which are in effect open-ended rights for American to buy various models of Boeing jets at agreed-upon prices.
“Our partnership with Boeing is a completely new way of doing business,” said Robert L. Crandall, chairman of American and its parent, AMR Corp., which also introduced the frequent-flier program, super-saver fares and complex computer reservation systems to the industry.
Big airlines normally order a few planes at a time, and with options to purchase additional specified jet models at rigid delivery dates. They also typically buy from at least two of the three major aircraft producers, and they usually have to pay stiff fees if they cancel orders.
But with Douglas and Airbus blocked from competing for American’s business for decades to come, those manufacturers could come under pressure to secure their own exclusive contracts with airlines, analysts said.
Fortunately for them, other big airlines are likely to consider copying American’s strategy, said Michael Lowry, president of Aviation Forecasting & Economics Inc. in Lake Oswego, Ore.
“The market is changing so rapidly, and in this day and age it’s absolutely essential that these carriers reduce their costs,” Lowry said. “This really gives [American’s] fleet-planning people a lot more flexibility, and that will lower costs and enhance American’s profitability.”
Airbus, in fact, has already taken a step in that direction. Early this month, USAir placed firm orders and options for up to 400 of Airbus’ small jetliners, and USAir was given flexibility to pick various models as it exercises those options.
But USAir, the sixth-largest U.S. carrier, is much weaker financially than American, and its Airbus order is contingent upon USAir’s significantly cutting its operating costs.
Airlines are increasingly deciding that replacing their mixed fleets with one manufacturer’s planes can also cut costs. That “commonality” reduces the airlines’ expenses for pilot and flight attendant training, spare parts and overall maintenance.
The Boeing pact will also help American’s fleet be more efficient by matching aircraft and route. For instance, if American decides at some point to launch a short-haul, lower-cost service in certain markets--as rivals United Airlines and Delta Air Lines have done--it could rapidly alter its order schedule to get more of Boeing’s smaller 737s.
American said the Boeing deal will give it the right to buy planes with as little as 15 months’ notice, about half the time it now takes between order and delivery.
Boeing shares closed up $1.125 at $97.50 on the New York Stock Exchange.
The Boeing pact became possible after the union board representing American’s pilots approved a six-year contract. The tentative agreement with the Allied Pilots Assn., now subject to its members’ vote, came after two years of often bitter negotiations in which American had sought $300 million in annual labor savings.
American didn’t get that, although it did get productivity improvements in exchange for giving the pilots a modest pay raise, stock options and more job security.
