AMR Corp. (NYSE: AMR), parent of US carrier American Airlines, has reversed a 15-year single-source purchasing program with Boeing Co. (NYSE: BA) and decided to split an order for 460 planes between US-based Boeing and European based EADS (OTC: EADSY), maker of the Airbus family of aircraft. American will purchase 260 of the new Airbus A320neo planes and 200 of Boeing’s venerable 737s beginning in 2013 and continuing through 2022.
Boeing may finally get the message that it needs to stop dithering around on a decision to upgrade its 737 aircraft. The company has been leaning toward developing a brand new plane as opposed to putting a new engine on the existing 737. The A320neo adopts a new, more fuel-efficient engine, which is the primary consideration among airlines faced with skyrocketing fuel costs.
Boeing has indicated in the past that its customers, particularly including Southwest Airlines Co. (NYSE: LUV), are clamoring for a new wide-body, two-aisle regional plane to replace the 737. Boeing’s order book in January included no new orders for the 737, seemingly vindicating its inclination for an entirely new design.
As of today, the company has 70 net new orders for the 737. That doesn’t seem too bad until you notice that 72 orders have been cancelled so far this year. Last year the company filled 486 net new orders for the 737, and in 2007 net orders for 737s totaled 846.
Of this year’s batch of orders, the only US commercial carriers to order more 737s are Continental Airlines, now part of United Continental Holdings, Inc. (NYSE: UAL) and Alaska Air Group Inc. (NYSE: ALK) with 11 and 15 new 737s ordered, respectively.
Southwest operates 550 Boeing 737s, the company’s entire fleet. The planes are, on average, 11.4 years old. Delta Air Lines Inc. (NYSE: DAL) operates 83 of the 737s and United/Continental operates 240 of the planes. US Airways Group Inc. (NYSE:LCC) operates 57 of the 737s.
By comparison, Delta operates 126 Airbus A319/A320 planes, United/Continental operates 152, and US Air operates 216 A319/A320/A321s.
And as an aside, Boeing’s order book for its new 787 Dreamliner stands at exactly zero today.
American’s order with Boeing includes 100 of the current version of the 737 and 100 of a new version using a new engine. The list price for current 737 is $80.8 million.
Airbus will supply 130 of its current A320 and 130 of the A320neo. The A320 carries a list price of $85 million and the A320neo list price is $91.2 million.
One analyst has told Barron’s that Boeing has “effectively confirmed” that it will scrap its plan to build an entirely new aircraft to replace the 737, and proceed with its original plan to re-engine the existing 737. It’s about time.
If, in fact, Boeing has decided simply to re-engine the 737, it would not be unreasonable to expect US carriers to begin placing orders again for the revamped plane. Boeing will remain behind Airbus in delivery schedules, and that may cost Boeing some orders. Still, having a re-engined plane could happen far more quickly than the 10 years or so it would take to get an entirely new design out the door.
That message is resonating with investors, even though Boeing lost an order for more than half the planes American will buy. Boeing’s shares are up about 3% near mid-day, at $72.69, in a 52-week range of $59.48-$80.65.