Analysis: AMR a prize, battle ground for Boeing and Airbus

By @ibtimes on

American Airlines, which once pledged loyalty to Boeing Co , has let Airbus back into the room for negotiations on a potentially huge contract that could have far-reaching implications for the plane makers as well as the third-largest U.S. airline.

By playing Boeing off its top rival, the AMR Corp

For Airbus, this is a chance to make inroads in the United States with a customer that once publicly committed to buying only Boeing airplanes for 22 years.

For Boeing, there is mostly risk in terms of orders and its ability to hold the line in its home country while the four-largest U.S. carriers gear up to place airplane orders worth billions of dollars.

Airbus has a shot. They have a very good shot at American, said Jack Stelzer, president of Worldwide Transportation Group Inc, an airline consulting company in Texas.

Boeing and Airbus are in high-level talks with American Airlines for an order for more than 250 narrow-body jets. The talks could culminate in a proposal by American Airlines executives to their board of directors next week. AMR has declined to discuss its upcoming orders.

The discussions come at an awkward time for Boeing as it decides how to upgrade its best-selling 737 narrowbody -- the aircraft it wants to sell to American. Boeing is debating whether to redesign the 737 or simply put a new engine in the current design. A full redesign would be more fuel-efficient but would take longer to bring to market.

Airbus has already said it would re-engine its competing A320. The European plane-maker has won firm orders for 668 neos worth $61.4 billion, and has lined up 361 provisional orders worth $33.4 billion, partly by wooing customers unwilling to wait for Boeing to decide.

Boeing says its customers want an all-new 737, but it has put off the decision repeatedly while it assesses its ability to redesign the plane.

There are a number of people, who are clearly forcing Boeing to make a decision. On the other hand, Boeing has a lot to lose by making the wrong decision, said Adam Pilarski, senior vice president at AVITAS, an airline consulting company that also works with aircraft lessors and lenders.

All the answers are at Boeing, Pilarski said. I'm not saying they have it. But it's Boeing's (order) to lose.

WHY NOW?

American Airlines last ordered Airbus planes in the late 1980s but declared in 1996 that Boeing would be its exclusive airplane provider through 2018. Flying a single-brand fleet cuts the cost of aircraft maintenance and crew training.

The airline had a nasty dispute with Airbus after the fatal crash of American Airlines flight 587 in 2001 in New York City, trading jabs in public over the cause of the crash of the jetliner, an A300-600. American Airlines pulled its last Airbus plane from service in 2009.

Today, the company's website shows a fleet of 619 planes, mostly made by Boeing and the former McDonnell Douglas, which Boeing bought in 1997. AMR has been replacing the gas-guzzling MD-80s with 737s for several years.

Recently, the airline's loyalty to Boeing has worn thin. AMR Chief Executive Gerard Arpey said in 2008 that the company would consider the next-generation narrow-body offerings of both Airbus and Boeing.

American Airlines, which until the 2008 merger of Delta Air Lines and Northwest Airlines was the world's largest carrier, is considered by many airline experts to be the weakest major U.S. airline financially. It is the only U.S. airline in the top five expected to posted a second-quarter loss, according to Thomson Reuters I/B/E/S.

American Airlines was leapfrogged in size again last year by United Continental Holdings after United bought Continental. Airline mergers have lent stability to the industry.

But AMR was left out of the last round of consolidation. Some experts believe the company, which reduced its debt and tweaked routes to lure well-heeled business travelers, eventually will make a bid for US Airways Group . US Airways has a mixed fleet that tilts heavily toward Airbus.

PRESSURE ON BOEING

Earlier this week, Boeing Commercial Airplanes Chief Executive Jim Albaugh confirmed the talks with American Airlines, saying: We're going to do whatever American wants us to do. But he made it clear once again that Boeing would not rush a decision on upgrading the 737.

Robert Mann, an airline consultant and former AMR fleet planner, said American wants to force Boeing to commit to a redesigned 737 that would trump the Airbus neo's fuel efficiency by using elements of the upcoming carbon-composite 787 Dreamliner.

They're shopping for Boeing to commit to an aircraft with better economics than either 737 (Next Generation) or A320neo, Mann said.

And as Airbus encroaches on Boeing's home turf, the pressure mounts on the U.S. plane-maker to re-engine its 737 if only to halt the Airbus advance.

Industry sources noted innovative proposals by Airbus to break into the U.S. market in the past, including in 1987 when it offered American the chance to hand back its 35 newly ordered A300-600 aircraft with 30 days' notice if it did not like them.

Airbus showed it ability to break the door down at other airlines with ground-breaking buy it if you like it deals giving them flexibility to confirm the bulk of a large order only after taking delivery of a handful of jets.

That was in the early days; we don't do those sorts of deals today, a source familiar Airbus's strategy said. That said, there is no doubt in the Airbus camp that winning the first American order in 24 years at a time when Boeing is perceived to be hesitating over its strategy would be a major coup.

(Additional reporting by Karen Jacobs and Tim Hepher; Editing by Steve Orlofsky)

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