Thursday, July 21, 2011

American Airlines buying European - Massive order from the US legacy carrier and the final warning for Boeing to act soon, says Frost & Sullivan

Posted by- Neelam Mathews
July 21, 2011

The views posted here are not that of Aerospace Diary.

Frost & Sullivan's Diogenis Papiomytis comments on American Airlines recent aircraft order

"There were two related announcements made yesterday by American Airlines. The first one was the biggest order for narrowbody aircraft ever made by a single carrier, with 460 orders split equally between the A320 and B737. This announcement cheered up the investor community, with both Airbus and Boeing share prices registering marginal increases. The second was AMR's results for Q2 2011, which were disappointing to say the least. Clearly the two news stories are the two sides of the same coin; American Airlines is in need of restructuring, as it holds some of the industry's worst first places:
-       The only US major that posted losses last year ($470M)
-       The only US major expected to post a loss this year, after a
disappointing Q2 with losses of $286M
-       The airline with one of the oldest fleets globally, with an
average age of 15 years
-       One of the two US airlines that have not (yet) gone through a
consolidation process

In our view, this order has been long overdue, as the airline is facing
ever increasing fuel and maintenance costs, partly as a result of the upward trend in fuel prices and partly because of its older and more inefficient aircraft. Looking at AA's fleet profile, it is also evident that the new orders will not be used to expand operations, but rather to replace its older narrowbody fleet.  In fact, AA's fleet size will remain roughly at the same levels over the 10-year modernisation period.

It can be argued that neither the decision to modernise, nor the
decision to split the order in four (130 A320, 130 A320neo, 100 B737-8, 100 re-engined B737), were options to AA. These were decisions forced upon them, by the prospect of missing out on vital aircraft delivery slots available at capacity constrained manufacturers.

However, the decision did have a positive externality, as it also forced
the hand of Boeing to choose between a new engine and a completely new airframe to replace the B737. Ever since Airbus announced its intent to bring to market the re-engined A320neo (December 2010), Boeing has been sitting in the sidelines procrastinating about the best strategy going forward. In the same period, EADS has registered a 43% growth in its share price, while Boeing's shares rose only by 9%. Obviously, the investor community is not as patient as Boeing's board of directors, when it comes to the roll out of game changing strategies; particularly
in a (soon to end) duopoly market.

The decision to offer AA a re-engined option, nonetheless, is a
short-term measure to avoid disaster, by partially stopping Airbus from winning the ultimate prize in the aircraft manufacturing world; that is stealing someone else's customer and convincing them to replace their existing fleet with yours. More than anything, Boeing has to act fast and decide in favour of a completely new airframe now. The alternative is to drop prices and follow Airbus in every sales pitch they are doing with old Boeing customers."

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