AMR Places Big Order for New Jets

AP

American Airlines to buy Boeing 787s

Wednesday October 15, 9:30 pm ET By David Koenig, AP Business Writer

American Airlines to buy new Boeing 787s to help make fleet more fuel-efficient

DALLAS (AP) -- American Airlines, suffering through one of the worst slumps to hit the aviation industry, is splurging on 42 new jets that have never flown a single paying passenger yet and come with a total sticker price of about $8 billion.

American, the nation's largest airline, said it also took rights to buy up to 58 more of the Boeing 787-9 aircraft.

Officials at American acknowledge that Wednesday's announcement is a bold move -- and a bit contrarian.

They are betting that the airline industry will be looking a lot better when the planes are ready for delivery, starting in 2012 and running through 2018.

"We've been criticized before for buying airplanes at the peak of the market only to have them delivered in the valley," said Daniel Garton, executive vice president of American parent AMR Corp. "Maybe this time we'll get the timing right."

Garton even compared American's move to the strategy of value investors such as Warren Buffett -- buy when everyone else is running from the market.

American also had important operational reasons for ordering the Boeing 787, which is to feature a fuselage made of new lightweight material instead of the traditional aluminum skin.

American has 150 wide-body jets that are used heavily on international routes. Many of

them are nearing retirement age. At a minimum, the 787s would be replacements for older planes that burn 20 percent more fuel.

That's a major consideration for an airline that spent $2.72 billion on fuel in the July-to-September period.

The new planes could even carry American's hopes to expand its international service, which has held up much better than domestic service in the current slump. The 787 is designed to carry up to 290 passengers and have a range of up to 8,500 nautical miles.

International routes are among American's most profitable, and they could get another boost if federal regulators grant American's wish for an antitrust exemption to expand its partnership with British Airways. Such approval would let American, BA and Iberia work together in setting prices and schedules on trans-Atlantic flights.

AMR Chairman and Chief Executive Gerard Arpey said the new plane represented a prudent investment for the long haul. It will reduce fuel and maintenance costs, and cut greenhouse gas emissions -- airlines may eventually face payments for those emissions.

Without discussing details, Arpey said the deal had "flexibility" built in to let American manage its fleet replacement and growth.

The order would be American's second big move to upgrade its fleet, among the oldest for U.S. carriers. The Fort Worth-based airline has already announced it will take delivery of 76 Boeing 737-800 aircraft in 2009 and 2010 to replace gas-guzzling MD-80s, which are used heavily on domestic routes.

AMR reported Wednesday that it had an operating loss of $360 million in the third quarter. That came on top of more than $1.7 billion in losses in the first half of the year. AMR has $15.4 billion in total debt -- $10.7 billion if you give the company credit for its cash and short-term investments.

So how will it afford planes that are worth around $8 billion, according to list prices? (Airlines usually get discounts, particularly on big orders, but American declined to give financial terms of the Boeing deal.)

It plans to borrow.

"We're pretty confident that we'll be able to find financing," Garton said in an interview.
American just completed lining up financing for 20 Boeing 737s that it had previously ordered.
The 787 purchase order is contingent on American's pilots going along. The union and management have clashed on many other issues, but Arpey said he believes the two sides can agree on how much pilots will earn for flying the new plane.

The order was welcome news at Boeing Co. facilities around Seattle. It could be Boeing's biggest plum of the year in dollar value, likely trumping Air China's announcement in July that it will buy 45 planes with a list price of $6.3 billion.

The orders indicate that Boeing's airline customers are not spooked by the machinists' strike that has closed Boeing's commercial airplane factories since Sept. 6. Some airlines are still making long-term fleet purchases.

The strike, however, will likely delay the first test flight of the 787, which had been planned for later this year. The production schedule has already been pushed back several times because of other glitches.

The first airline scheduled to receive the plane, All Nippon Airways Co., said late last month that it expected to get its first one next August.

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From "The Street.com" below

Deal

is contingent on American reaching an agreement with its pilots to fly the aircraft. 10/15/08 - 05:02 PM EDT

Ted Reed

Despite a volatile economy and a $360 million third-quarter adjusted loss, American Airlines parent AMR (AMR Quote - Cramer on AMR - Stock Picks) said Wednesday it has ordered 42 Boeing (BA Quote - Cramer on BA - Stock Picks) 787 jets and has options for 58 more. "This is a difficult decision in these incredibly volatile times, but it is fundamental to the long-term strategy of the company, and we felt it was a wise decision to make," said Dan Garton, executive vice president for marketing, in an interview. "

Airlines are often criticized for buying at the peak and having the airplanes delivered four years later, for buying when things are great and then having the [deliveries] when things are bad," he said. The order has a book value of $20 billion, but airlines invariably pay less than book value for new aircraft. Garton said American is not concerned about financing, since the first delivery is four years off. "It's very likely there will be some slippage to the original schedule," given delays in the 787 program and the ongoing strike at Boeing.

While it's rare for a carrier to acknowledge that an order might not be on schedule the day it's placed, Garton noted that "it's not ideal to enter into an agreement when you have uncertainty, but it's a reality we have to face." The planes would replace aging widebodies in the American fleet, including Airbus 300s, as well as 767s and 777s.

The first 42 deliveries are scheduled for 2012 to 2018, with the 58 option deliveries tentatively planned for 2015 to 2020. The deal is contingent on American reaching an agreement with its pilots to fly the aircraft. Meanwhile, AMR said its third-quarter loss resulted primarily from a fuel bill that was $1.1 billion higher than in the same quarter a year earlier. The loss was equivalent to $1.39 a share. Analysts surveyed by Thomson Financial had estimated a loss of $1.50. Revenue rose 8% to $6.4 billion, slightly ahead of expectations.