American Airlines parent AMR Corp. is counting on savings from 460 new, fuel-efficient jets and $13 billion in planemaker financing as the third-largest U.S. carrier struggles with losses in 10 of the past 12 quarters.
“AMR had to make a bold move,” Ray Neidl, a Maxim Group analyst, said today in a note to investors. “These moves in our opinion are not only positive for the company’s future but are necessary for its long-term survival.”
While Fort Worth, Texas-based AMR was little changed as the Bloomberg U.S. Airlines Index fell 1.3 percent, analysts such as JPMorgan Chase & Co.’s Jamie Baker in New York questioned how Boeing Co. and Airbus SAS jets would help a carrier that lags behind the rest of the industry in returning to profit.
“When enterprises lose money by such a wide margin relative to peers, one would normally expect a material cost-reduction program and/or aggressive top-line strategy,” Baker told clients in a note. “We see neither in the case of AMR.”
The record jet order, with 260 from Airbus and 200 from Boeing, will allow American to retire some of the oldest planes in U.S. fleets. The new aircraft will have a list value of about $38.5 billion based on average prices, and the deal includes options and future purchase rights for 465 more.
Manufacturers’ financing for the first 230 jets was more than AMR “would otherwise be able to raise effectively on our own,” Chief Executive Officer Gerard Arpey told employees in an e-mail.
Until today, American hadn’t placed an Airbus order since 1987. The carrier retired its last Airbus model, the A300 wide-body jet, in 2009 as part of a step to trim costs by maintaining a fleet drawn from just one planemaker.
AMR President Tom Horton described the Boeing and Airbus orders as two transactions, “not a split deal.”
“Our thinking evolved over the course of the process,” Horton said in a Bloomberg Television interview. “Once we saw how much how much financing was brought to bear, we concluded that the best course of action was to do both deals.”
AMR fell 1 cent to $4.92 at 4 p.m. in New York Stock Exchange composite trading. The shares have tumbled 37 percent this year, with AMR the only major U.S. airline company projected to show a 2011 loss, based on analysts’ estimates compiled by Bloomberg.
Boeing gained $1.54, or 2.2 percent, to $72.07 in New York, while Airbus parent European Aeronautic Defence & Space Co. climbed 86 cents, or 3.6 percent, to 24.79 euros in Paris.
American’s 737s will include 100 of a new, as-yet-unnamed version with upgraded engines, making the airline the first customer for a model that Boeing’s board will consider in August. The Airbus jets will be A320s, split between the current model and the so-called neo with new engines.
“We understand that American’s fleet (and brand) are tired, but this announcement represents a ton of new capital being put into a failing business model,” Kevin Crissey, a UBS AG analyst in New York, said in a note to investors. “We hope management is able to reassure the Street that profits are imminent to support this level of expenditure.”
Financing from Airbus and Boeing shows the planemakers’ confidence in AMR’s strategy to return to profit and gives the carrier breathing room while repairing its balance sheet, said Vasu Raja, American’s managing director for corporate planning.
The order allows for a “very radical transformation” of American’s business, Raja said in an interview.
AMR said today that its second-quarter loss widened to $286 million, or 85 cents a share, from $11 million, or 3 cents, a year earlier. The loss exceeded the average estimate of 81 cents among 13 analysts surveyed by Bloomberg.
American stayed on the sidelines in the past three years as Delta Air Lines Inc. bought Northwest Airlines in 2008, United Airlines and Continental Airlines merged last year to become United Continental Holdings Inc. and Southwest Airlines Co. acquired AirTran Holdings Inc. in May.
Those transactions dropped American to third in the U.S. industry by traffic, a disadvantage in an industry where large route networks are more attractive to corporate-travel clients. The deals also thinned the ranks of potential consolidation targets for AMR.
“American management recently has been criticized for being ‘asleep at the switch’ and only reacting to developments,” Maxim’s Neidl said.
While today’s move “demonstrates that they are thinking of the future,” AMR’s work isn’t done, Neidl wrote. “Management has to do something in the short term to stem losses. Longer-term, they may need a merger partner.”