American Airlines: Boeing's Last Stand

American Airlines (NYSE: AMR) has begun to consider replacing 250 of its oldest planes, according to The Wall Street Journal. That is nearly four out of ten aircraft in its entire fleet. AMR’s finances are not solid, so it is difficult to see how the purchases would be funded, but they would take place over many years.  An aircraft manufacturer might provide a credit source to close a sale that would be so large.

The face value of the purchases is $15 billion. Boeing (NYSE: BA) and Airbus will compete for the orders. Boeing is the current supplier to AMR, so the business is its to lose.

Boeing has been a battered company since current CEO W. James (Jim) McNerney, Jr took over in 2005. He beat out Alan Mulally for the job. Mulally was the head of Boeing’s commercial aircraft division. He has gone on to become a spectacular success as chief of Ford (NYSE: F). The Boeing board must regret its decision.

On McNerney’s watch, Boeing has had countless problems with its new flagship the 787 Dreamliner. The plane will begin to be delivered this year. That will make it at least two years behind schedule. Some airlines have said they might cancel orders of the Dreamliner or seek penalties from Boeing.

Boeing share are down 10% over the last five years, while the DJIA is higher by 10% over the same period. A loss of the AMR business could cripple Boeing. Boeing’s annual revenue over the last three years has averaged $65 billion. Net income has only averaged $2.5 billion.

AMR might not even be seriously considering Airbus if it were not for Boeing’s problems. The airline would almost certainly use Airbus as a bargaining chip to squeeze better terms from Boeing.   Airlines have grown tired of Boeing’s endless talk and now want to see results.

Douglas A. McIntyre