American to Defer 22 Airbus A350 Wide-Body Jets to Slow Spending

Updated on
  • Delay to reduce capital expense $1.2 billion over two years
  • Changes announced as American profit tops analyst estimates

American Airlines Group Inc. will defer delivery of 22 wide-body aircraft to spread out more than $1 billion in spending.

The world’s largest airline reached an agreement with Airbus Group SE to take A350 XWB aircraft from late 2018 through 2022, deferring each plane’s arrival by an average of 26 months. American previously was to get the first A350 in spring 2018, according to a statement Friday.

The move will save American $500 million next year and $700 million in 2018 as some investors are questioning its use of debt to finance new planes. It also gives the Fort Worth, Texas-based carrier more flexibility in how to use its fleet, President Scott Kirby said Friday.

“All these aircraft were scheduled to be replacements for existing aircraft,” he said on a conference call. “We can extend some of the leases longer to keep flying and keep the existing plans in place or, given a weak international environment, pull back on what our growth plans otherwise would have been.”

The airline advanced 2.5 percent to $35.84 at 12:12 p.m. in New York. Airbus fell 1.2 percent to 51.40 euros.

‘Clear Positive’

With the deferrals, American’s capital spending on planes will peak this year along with its net debt, said Chief Financial Officer Derek Kerr. The carrier will pay $4.4 billion for aircraft this year, $4 billion in 2017 and more than $2 billion in each of 2018, 2019 and 2020, he said.

“That’s a clear positive,” Joseph DeNardi, an analyst at Stifel Financial Corp., said in an interview. “They don’t need the planes and they are trying to lower their capex profile.”

Reduced spending because of the delayed A350 deliveries will provide a lift to free cash flow after the airline’s “aggressive” fleet renewal program and share repurchases boosted total debt, Mark Streeter, an analyst at JPMorgan Chase & Co., said in a note.

American also reported second-quarter profit Friday that topped analyst estimates as lower fuel prices helped offset the effects of a lackluster global economy.

Exceeding Estimates

Adjusted earnings fell to $1 billion, or $1.77 a share, exceeding the $1.68 average of analyst estimates compiled by Bloomberg. Revenue fell 4.3 percent to $10.4 billion, the company said. That compared with $10.3 billion anticipated by analysts.

American expects revenue from each seat flown a mile, a key industry metric that reflects fares and demand, to fall 3.5 percent to 5.5 percent this quarter from a year earlier. So-called unit revenue has been down for more than a year, although Kirby said he expects the measure to improve.

“We’re looking forward to getting back to growing” that benchmark financial gauge, he said.

The carrier also sees a pretax profit margin, excluding special items, of 12 percent to 14 percent this quarter.

American said last week it would cut growth plans by 0.5 percentage point, to 2 percent, for 2016, as airlines seek to address a supply glut that has led to more than a year of declines in passenger revenue for each seat flown a mile. Delta Air Lines Inc. and United Continental Holdings Inc. have also announced capacity reductions since then.