American Airlines expected to announce order of 250-plus planes today

By Andrea Ahles

aahles@star-telegram.com

American Airlines is expected to announce a major order today for at least 250 airplanes, with options for more, as the Fort Worth-based airline moves to replace most of its aging narrow-body fleet, sources said Tuesday.

AMR Corp., American's parent company, may also announce that it will spin off its regional carrier, American Eagle. The company's board of directors was considering the move at a board meeting Tuesday evening, according to a memo from the Eagle pilots union.

The potential announcements would come as AMR reports its second-quarter earnings. Wall Street analysts predict a $250 million loss, making it the only major U.S. airline expected to record red ink for the quarter.

American is looking to swiftly lock up orders for more fuel-efficient jets and has been wooed heavily by both Airbus and Boeing. Analysts said it was not clear which company stands to win, with several speculating that American could buy planes from both. Some estimated that the order could reach 400 planes or more.

American spokesman Tim Smith declined to comment on the possible aircraft order or the American Eagle spinoff.

AMR has previously said it was investigating the possibility of selling or spinning off the regional carrier into an independent company. According to the memo written by Tony Gutierrez, chairman of the American Eagle Master Executive Council of the Air Line Pilots Association, the pilots union has reached a settlement with AMR regarding various issues related to the potential divestiture. Included in the settlement is a guarantee that Eagle pilots will be offered jobs at American Airlines "in the future," if more pilots are needed as it grows its fleet.

American's negotiations with Boeing and Airbus have caught the attention of the aerospace industry. Europe's Airbus would love to take home a big order and end American's 15-year sole-supplier relationship with Boeing.

With oil prices continuing to hover around $100 a barrel, airlines have been pushing the manufacturers to introduce new or re-engined aircraft that are cheaper to operate. Airbus has introduced its A320neo series, which stands for new-engine option, but it won't be ready for delivery until 2015 at the earliest.

American is looking to replace its aging MD-80s and Boeing 757s with more fuel-efficient planes. It has been replacing the MD-80s with Boeing 737-800s, which American says are 35 percent more fuel-efficient per seat-mile.

As of Dec. 31, American still had 224 MD-80s that were an average of 20 years old and 124 Boeing 757-200s that were an average of 16 years old. The carrier uses the narrow-body aircraft mostly on domestic routes.

Boeing has been reluctant to pursue a re-engine option for its popular 737 series, instead holding out plans for an all-new aircraft around 2020. But analysts say Airbus' 1,000-plus orders for re-engined A320s may have forced Boeing to offer a re-engined version of the 737, a more complex task because of the plane's design.

"A split order seems likely," said Peter Arment, aerospace industry analyst for Gleacher & Co. Boeing may have to push back the new plane and modify the 737 to keep Airbus from taking an ever-larger share of the narrow-body jet market.

"It's better to eat your own lunch than have someone else do it," Arment said.

Industry analysts have questioned American's planned capacity growth for 2011. If American does buy more than 250 planes, the order could exceed $20 billion, with 737-800s and A320s priced at more than $80 million apiece.

"We see no end in sight to this cycle of capital destruction, as management's strategy appears focused on building a robust network with younger planes -- all too reminiscent of classic airline behavior," Wolfe Trahan analyst Hunter Keay wrote in his quarterly airline report last week. "Barring significant, transformational change we see little long-term upside for shares of AMR outside of a 'rising tide' scenario for all airlines."

Earlier this week, shares of AMR (ticker: AMR) fell below $5 for the first time since August 2009. On Tuesday, they closed up 2 cents at $4.93.

Financing will be a critical part of any order as American's balance sheet remains in the red. American may choose to lease planes, similar to last week's sale-leaseback deal with AerCap for previously ordered Boeing 737s. AerCap, an independent aircraft leasing firm, will buy the aircraft from American and lease them back to the airline under the arrangement.

Airbus has aggressively courted carriers with financing deals that would lessen the upfront costs for airlines if they choose it over Boeing.

An Airbus sales team worked from a hotel in Irving to press its case with American, one source said, as negotiations continued ahead of an AMR board meeting. Boeing's commercial airplanes chief, Jim Albaugh, visited American last week, saying he had a "good meeting" with CEO Gerard Arpey.

Staff writer Bob Cox contributed to this report, which includes material from Bloomberg News.

Andrea Ahles, 817-390-7613

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