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Delta Signs Contract to Buy Jets Only From Boeing

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TIMES STAFF WRITER

Boeing Co. signed another blockbuster pact Thursday to be an airline’s sole supplier of jets for 20 years--this time to Delta Air Lines in a $15-billion deal--that promptly sparked complaints from Boeing’s only major rival.

Delta, after rejecting an offer from Airbus Industrie, placed firm orders for 106 Boeing planes worth $6.7 billion--a record-high sum for a single placement of firm orders, Boeing said. Delta also placed options to purchase an additional 124 aircraft valued at $8.3 billion.

The pact came only four months after Boeing inked its first sole-supplier contract--a $6.5-billion, 103-plane deal with American Airlines--and both deals vastly change the ground rules for selling commercial aircraft.

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Boeing naturally likes the arrangement because it shuts out a competitor for years and promises its assembly lines a steady diet of work. In turn, the deal enables Delta to save costs by narrowing the number of brands in its fleet, and it gets more flexibility to choose various sizes of planes as future market conditions warrant.

The deal “will streamline our fleet of airplanes,” Delta Chairman Ronald W. Allen told a news conference at Delta’s Atlanta headquarters.

“It’s a significant development in the aerospace industry,” said Byron K. Callan, an analyst with Merrill Lynch & Co. in New York. “These deals are fundamentally altering the relationship between airframe manufacturers and the airlines.”

They’re also harming competition in an industry where Boeing and Airbus are the only two major producers left, said Airbus spokesman David Venz at the company’s North American headquarters in Herndon, Va.

The third builder of big jets, Douglas Aircraft Co. in Long Beach, is now only a small, niche player. Moreover, Douglas and its parent, McDonnell Douglas, have agreed to be acquired by Boeing.

“We’re the lone ranger that believes in competition, because clearly Boeing doesn’t,” Venz said. “Boeing is using its dominant market position and these exclusivity deals to overpower its last competitor.”

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Boeing was unmoved. “They were in the competition with us . . . they had their chance to make their pitch,” said spokeswoman Liz Verdier at Seattle-based Boeing.

She also noted that in November, US Airways (formerly USAir) signed a near-exclusive deal with Airbus by ordering at least 120 Airbus jets worth $5 billion. “We were terribly disappointed when they got the US Airways order,” Verdier said.

Ron Woodard, head of Boeing’s commercial airplane group, said he did not expect such exclusive deals to become commonplace, anyway.

Having a sole supplier “makes tremendous sense, but I don’t think there are a large number of airlines in a [financial] position to do it,” Woodard said at the Atlanta news conference.

Merrill Lynch’s Callan said it’s still too early to say if Boeing’s exclusive deals are eroding competition in aircraft manufacturing, an industry that delivers roughly $30 billion of new airplanes annually and relies on thousands of vendors--many of them in Southern California--for parts and other supplies.

Nonetheless, he noted that the major U.S. airlines are rapidly becoming divided into two camps: Besides American and Delta, Southwest Airlines also buys its jets solely from Boeing, while US Airways is almost solely an Airbus customer.

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Before, airlines had typically bought batches of jetliners at various times and from various producers. Delta, for instance, now flies planes built by Boeing and Douglas, and it’s still flying L-1011 wide-bodies made by Lockheed Martin Corp., which abandoned commercial jetliner production years ago. (Delta’s L-1011s are being retired, however, and will be replaced with planes from the new Boeing order.) Airlines save maintenance and flight crew costs if they have fewer airplane brands in their fleets.

Delta’s big order is the latest chapter in the airline’s comeback from the early 1990s. A healthier economy, rising passenger traffic industrywide and Delta’s own massive cost-cutting efforts have helped the carrier recover.

After losing nearly $2 billion from 1991 through 1994 (Delta’s fiscal year ends June 30), the carrier has been profitable for seven straight quarters.

Delta’s stock slipped 12.5 cents a share, to $84.375, while Boeing’s stock rose $1, to $105 a share, both in New York Stock Exchange composite trading Thursday.

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