ALL EYES ON GREECE AND US DOMESTIC MARKET AS AMERICAN AIRLINES (AA) FORCE BOEING TO MAKE PAINFUL CHOICE – THE REAL WINNERS THIS WEEK: AA AND CFM

Dino D'Amore
By Dino D'Amore July 21, 2011 08:32

ALL EYES ON GREECE AND US DOMESTIC MARKET AS AMERICAN AIRLINES (AA) FORCE BOEING TO MAKE PAINFUL CHOICE – THE REAL WINNERS THIS WEEK: AA AND CFM

The big news today is the meeting between Greece and the EU to resolve the crisis engulfing the Euro Zone. If the Germans are not willing to take an almighty hit to their finances then we can all expect a terrible financial storm far worse than 2007. European airlines on the main, other than premium travel, are still struggling and are still cutting back on schedules. Moreover take the time to look at the US market, especially the load factors of Delta, it has had a very impressive period and thus is a good barometer for assessing falls in demand for air travel. Delta’s announcement yesterday that is it cutting back on 24 routes within the US is a sign of things to come, however.

On the American Airlines order: This is most likely the most impressive aircraft order ever in terms of flexibility and benefit to the airline concerned. All credit to the AA team and all those involved in the deal including Skyworks Capital LLC, the AA advisor on the deal.

As reported yesterday, Boeing appears to have been forced into signing off on a new re-engined variant of the 737.

AA has ordered 460 narrowbody aircraft, its largest ever order as it tries to create the youngest, most fuel-efficient fleet among US industry peers in approximately five years.

The agreement includes options and purchase rights for 465 additional aircraft through 2025 making it the largest order by number of aircraft ever. AA is to be first US network carrier to take delivery of the A320neo Family aircraft and first airline to commit to Boeing’s expected new 737 family offering.

Under the agreement with Boeing, American plans to acquire a total of 200 additional aircraft from the 737 family, with options for another 100 737 family aircraft. American has the flexibility to convert the new deliveries into variants within the 737 family, including the 737-700, 737-800 and 737-900ER.

American also will acquire a total of 260 Airbus aircraft from the A320 Family and will have 365 options and purchase rights for additional aircraft. American has the flexibility to convert its delivery positions into variants within the A320 Family, including the A319 and A321.

American will take delivery of 130 current-generation Airbus A320 Family aircraft beginning in 2013. Beginning in 2017 American will begin taking delivery of 130 aircraft from the A320neo Family.

American also will benefit from approximately $13 billion of committed financing provided by the manufacturers through lease transactions that will help maximize balance sheet flexibility and reduce risk. The financing fully covers the first 230 deliveries.

Gerard Arpey, Chairman and CEO of AMR and American Airlines, noted that the order represents another important step in the Company’s strategy to build a strong foundation for the future.

This deal is the right deal made at the right time with an airline in a very powerful position. CFM with its cast iron will to gain market share at all costs for the Leap X can take a great deal of the credit for forcing all of this through. They have offered engines on the A320neo at crazy prices, from which it can be deduced that this led directly to Boeing’s announcement for a new re-engined 737 with, yes, CFM Leap X on wing. CFM has played the game over the last six weeks and has won out. The CFM product may be streets behind the P&W offering at this time but the strategy of the US/Franco alliance should not be underestimated. You have to give it to them, AA will, no doubt be holding a “thank you” party for CFM sometime soon. Boeing now has to spend a great deal of money on R&D but it does have some leeway and time to come up with something that can impress the industry: the question whether it will? All that we can say for sure right now is that within five years there are going to be MD80s remarketed all over the world and parts for the same will fall in price even further.

Dino D'Amore
By Dino D'Amore July 21, 2011 08:32
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