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Boeing Wins British Airways 787 Order in IAG Fleet Revamp

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April 4 (Bloomberg) -- British Airways parent IAG will buy 18 additional 787 Dreamliners, a vote of confidence for Boeing Co.’s troubled wide-body jet, with a chance for more purchases by the Spanish sister unit Iberia that has favored Airbus SAS.

British Airways is exercising existing options for 787s for delivery from 2017 through 2021 to help phase out 57 Boeing 747-400s, according to a statement late yesterday. IAG, which has already ordered 24 Dreamliners, also secured delivery slots for future Iberia needs, saying its creation through a merger in 2011 has resulted in greater buying power for the two airlines.

Firming up the order, with a value of more than $3.7 billion at list price, sets off a fleet renewal for IAG that will eventually see it retire 46 Boeing 777-200s at British Airways and Airbus A330s and A340s at Iberia. Chief Executive Officer Willie Walsh said an Iberia deal is conditional on a revamp at the unprofitable subsidiary, raising the stakes in a battle with employees who are facing more than 3,000 job cuts.

“This deal looks sensible as BA needed to address its aging 747s renewal, while fuel efficiency should boost returns,” said James Hollins, a London-based analyst at Investec who recommends buying the stock.

IAG shares closed 0.8 percent lower at 252.30 pence in London. The stock has gained 37 percent this year, valuing the company at 4.68 billion pounds ($7.1 billion).

Fuel Efficiency

The 787 “offers a step change in fuel-burn efficiency versus our existing aircraft,” Walsh said in a statement, citing an anticipated 20 percent improvement in fuel costs per seat.

IAG, as London-based International Consolidated Airlines Group SA is known, will need to replace about 105 planes in the next 10 to 15 years, said Damian Brewer, an analyst at RBC Capital Markets in London. The company is also talking to Airbus about the purchase of A350 long-range aircraft, the Wall Street Journal reported on April 1.

Iberia currently operates only Airbus wide-bodies for its intercontinental flights. Handover of the BA 787s, powered by Rolls-Royce Holdings Plc Trent 1000 engines, will start this year once Boeing resumes deliveries suspended on Jan. 16 following battery glitches.

Battery Correction

Boeing is working to certify an upgrade of the Dreamliner’s battery system with regulators after fire incidents caused the U.S. Federal Aviation Administration to ground the fleet.

British Airways will also begin taking delivery of Airbus A380s this year, with commercial service to Los Angeles starting Oct. 15 as the airline tries to reduce its fuel consumption with the more efficient planes. It is buying 12 of the Airbus flagship aircraft with deliveries through 2016.

IAG has several years to exercise the 787 options as Walsh implements an overhaul plan for Madrid-based Iberia, which suffered a 351 million-euro ($450 million) operating loss last year. IAG is aiming for a 600 million-euro earnings turnaround by 2015, which has led to several waves of strikes at Iberia.

The disruption, along with timing of Easter, led IAG’s premium traffic to fall 2 percent in March compared with a year earlier, the carrier said today in a statement. Group-wide traffic, measured by the number of passengers multiplied by the distance flown, increased 0.1 percent. The five days of Iberia strikes last month pared group capacity 0.8 percent, it said.

Frequency Focus

Under the previous Dreamliner order, agreed in December 2007, British Airways is buying 16 787-8s and eight of the larger 787-9s that Boeing intends to start delivering from next year. The use of 787s to replace 747s indicates the airline is focused on operating smaller aircraft on more frequent long-haul routes to boost market share and fares, Brewer said.

Boeing also is planning a larger Dreamliner, the 787-10X, which would come closest to replacing the 345 seats the airline offers on its 747s. IAG didn’t say which models would be purchased under the expanded deal.

“We are delighted that our valued customer IAG plans to increase the number of 787s in the British Airways fleet, which is testament to the 787’s unrivaled fuel efficiency and passenger comfort,” Boeing said in an e-mailed statement.

Boeing had booked only one 787 order this year, for 42 aircraft from American Airlines in a deal announced before the Dreamliner was grounded. Oman Air and Norwegian Air Shuttle AS, both existing 787 customers, have said since the suspension of flights that they would consider buying additional planes.

To contact the reporters on this story: Robert Wall in London at rwall6@bloomberg.net; Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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