United May Amend $12.4 Billion Airbus Deal to Take Smaller JetsBy and
CFO Levy says A350-1000s may be swapped for smaller aircraft
Carrier also is considering the Max 10X that Boeing may build
United Continental Holdings Inc. may convert a $12.4 billion order for Airbus Group SE’s largest twin-engine jet to smaller long-range models. It’s also interested in a new Boeing Co. 737 Max that’s still on the drawing board.
Those are among the multibillion-dollar changes under consideration as a new management team reviews the Chicago-based carrier’s order portfolio and revamps its fleet strategy, Chief Financial Officer Andrew Levy said in an interview. The goal: to close a profit gap with Delta Air Lines Inc. and American Airlines Group Inc.
United is weighing the conversion of Airbus A350-1000s as it looks to replace its fleet of 747 jumbo jets. The carrier could switch to a smaller version of the aircraft, or even the mid-sized A330. That would dent Airbus’s order book, since United is the second-largest customer for the -1000 variant, which took its first flight last week.
The airline also is studying the so-called Max 10X, a stretch of Boeing’s largest 737, after deferring 61 of the company’s smallest jets this month. The support from a blue-chip airline customer may help the planemaker close the business case for the proposed new variant, intended to help catch up to sales of Airbus’s A321neo.
“These fleet decision are big decisions, they affect your balance sheet for a long time,” Levy, 47, said in the interview at United’s Chicago headquarters. “These are big capital decisions that you have to live with for a really long time, so you need to make sure you get it right.”
The A350-1000 has only garnered 195 total orders, according to Airbus’s website. Qatar Airways is the largest customer for the jet, which is similar in size to Boeing’s 777-300ER. An Airbus representative declined to comment.
Levy said United also is rethinking its share buybacks after announcing a $2 billion repurchase plan this summer that followed a $3 billion effort from a year earlier. The pace may need to slow because of significant increases in labor expenses from several new union contracts as well as rising fuel costs, he said.
United Chief Executive Officer Oscar Munoz unveiled a $4.8 billion plan this month to reap greater revenue and savings from its worldwide route network. That includes improvements in the way the airline forecasts demand and manages seats, which is expected to generate an extra $900 million a year. Cost-cutting moves will save another $700 million by 2020, compared with last year’s level.
Munoz pledged to reshape the executive corps he inherited when he became CEO in September 2015 and has been under pressure from investors to improve performance. With new agreements with workers in hand, the focus now is to lift United’s operating profit, which amounted to 13.6 percent of sales last year. Industry leader Delta had a 19 percent margin and American’s was 15.1 percent.
Scrapping current jet orders altogether is unlikely because it would be too costly, Levy said. United plans to accept delivery of 14 of Boeing’s ultra-long 777-300ER, the first of which is due to arrive within weeks. That is a “done deal,” he said.
Boeing met with United officials recently to discuss the Max 10X, a longer version of the largest 737 model. It “definitely looks to be of interest to us,” Levy said.
United’s interest is critical as Boeing weighs how to respond to the Airbus A321neo, which has emerged as a hot-seller for airlines flying trans-continental routes.
Boeing is mulling two options. One is a simple stretch of the Max 9 that would enter the market by 2019 and rely on a higher-thrust version of the Leap-1B engine developed for the Max family. The Chicago-based planemaker is also studying a more extensive revamp that would rely on the larger Leap created for Airbus and would be ready to fly commercially by late 2021.
“We are continuing to work through the business case and talk to customers about a potential Max 10X,” Boeing spokesman Paul Lewis said. “Once this process is successfully completed we will be in a position to share more details.”
Deferring the 61 737-700s was an easy call, Levy said, because of the jet’s small size and older technology. United also is considering the more advanced 737 Max 8 or the Max 9 models as replacements, Levy said.
Levy likes Bombardier Inc.’s C Series jets but until a review of United’s entire fleet is completed he’s unsure “if there’s a place for a 100- to 120-seat airplane.”
United placed the A350-1000 order in 2013, upgrading an earlier deal, and it has a value of $12.4 billion at list prices before big discounts that are customary for major airlines. Levy wants to look at whether United should swap out some or all of those aircraft for other wide-body jets, such as the A350-900, which can fly longer routes, or the smaller A330.
“Since we have the opportunity let’s look at what we think would be ideal,” he said.
— With assistance by Benjamin D Katz