WILL THE MARKET UPTURN CONTINUE LONG ENOUGH FOR AMERICAN?

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By TESTCustomwebLP TESTCustomwebLP November 18, 2010 21:54

WILL THE MARKET UPTURN CONTINUE LONG ENOUGH FOR AMERICAN?

Last week you will recall that the FAA issued a statement saying that retirement ages will be set for all aircraft. Manufacturers will have up to five years to work with regulators on determining the “limits of validity” for each aircraft type; airlines will have more time after that to work through how they maintain planes under the new rules.

Once regulators and aircraft manufacturers agree on a maximum age for an aircraft type, airlines may choose to retire older planes instead of undergoing what is expected to be much more rigorous and costly maintenance schedules. The new rules will be phased in over several years, making the impact on carriers difficult to predict.

The limits proposed Friday by the FAA suggest the MD-80s flown by American Airlines (AA) should fly no more than 50,000 “cycles” – one takeoff and landing. Out of a fleet of 619 jets, American flies 247 MD-80s, which were an average of 19 years old. AA is adding Boeing 737-800s at the recent rate of one every two weeks to replace its MD-80s at great cost.

Moreover some of AA’s 767-200s are older than its MD-80s, with the average age of its fleet of Boeing 757s at 16 years.

So AA will have to renew the bulk of its fleet fast if it is not to suffer huge maintenance costs as the regulations come into effect, at the same time the recovery of the airline’s finances is by no means certain. AA is likely to have a very hard time of it and due to similar regulations coming into effect cross the globe it will have problems selling its current aging fleet. Expect AMR shares to come under pressure as this story runs and if the recovery falters then expect AA to enter dangerous financial territory. Turning to the lessors could be the best option for the airline.

The other story to watch out for is of course what the FAA and manufacturers will decide is the lifespan for new aircraft with more composite components. Composites, which are used extensively in the 787 and A350 XWB, don’t crack but do delaminate as they get older and can degrade. However, it has never been clear how durable the composites will be over time. If an unexpected announcement is made that gives these new aircraft a life span of less than 20 years then the industry will be in a game changing situation. It is all good news for MROs and manufacturers but for airlines and lessors and aircraft remarkters, a strategic rethink is required in the long term.

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By TESTCustomwebLP TESTCustomwebLP November 18, 2010 21:54
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