Business

Manufacturing

Airbus and Boeing battle over next generation of fuel-efficient aeroplane— London

Preface

Last week, American Airlines placed the largest single aircraft order in history.

Airbus, Airplane, Boeing

26 July 2011

Last week, American Airlines placed the largest single aircraft order in history. To replace its ageing fleet, the airline signed up for 460 narrow-body aircraft to be delivered over the next 11 years. What made the order even more significant was that American ordered 260 of these aeroplanes from European manufacturer Airbus, ending American’s two-decade long loyalty to Boeing.

American appears to have handled the negotiations craftily, pitting the two manufacturers against each other — Airbus desperate to break in, Boeing desperate to keep them — then sealing a great deal with both. The manufacturers combined to commit $13bn (€9bn) to financing the first 230 aircraft in the order, at no doubt much better rates than a bank would have given the airline.

Although Boeing did receive a proportion of the order, this deal represents a huge coup for Airbus. A major factor in its win was the fact that it could offer its upcoming A320neo, a re-engined version of the A320 plane, that promises up to 12 per cent improvements in fuel burn. Until now, Boeing hadn’t decided whether to re-engine its own offering, the 737, or to build an entirely new aeroplane. But Airbus has seen over 1,000 orders for the A320neo since its launch earlier this year and American’s insistence on needing more fuel-efficient planes was the final straw. Boeing was effectively forced into committing to a re-engined 737 that could enter service around 2016. Essentially, Boeing is now playing catch-up. American lost $286m (€197m) in the second quarter of this year. It raises the question: why would an airline that is losing money place such a large order for aircraft? From a long-term planning perspective, this move might actually be a sensible one. American has hundreds of older, inefficient planes in its fleet constantly dragging on its bottom line, and this order will give them the youngest and most fuel-efficient fleet in the US within five years.

“Since the US airline market is characterised by older fleets, weak demand and razor thin profit margins, any customer that suddenly enjoys a 10 to 12 per cent discount on a very expensive fuel price has a large advantage,” says Richard Aboulafia, vice president of analysis at Teal Group. “Other US carriers will likely follow American, setting off a wave of new orders.”

That means both manufacturers may now need to look at ramping up production rates just to keep up. If even a couple of the other US network carriers decide to follow suit in order to stay competitive, the pressure gets even stronger on assembly lines and means the Boeing versus Airbus battle will only get more interesting.

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