American Air Plans Big Jet Purchase

By DANIEL MICHAELS And SUSAN CAREY

American Airlines is in active negotiations with Airbus and Boeing Co. to replace about 38% of its current fleet by purchasing at least 250 aircraft, said people familiar with the matter.

The roughly $15 billion order, if completed, would be one of the largest by any airline and have major implications for the archrivals. A loss for Boeing would threaten the lock it has had on American's business for decades. Even a partial win for Europe's Airbus would provide a big psychological victory.

Any purchase would be an important strategic move for AMR Corp.'s American, which has fallen to No. 3 world-wide from its perch as the world's largest carrier. It is trying to find a turnaround strategy that will deliver profits and restore its stature in the industry.

According to two people familiar with the talks, American first hashed out a tentative deal with Airbus several weeks ago, without telling Boeing the two were in talks. American then went to Boeing with the Airbus offer and asked the Chicago aerospace giant to make a counter offer.

The package Airbus offered included an outline of financing terms that were very appealing to American, one of these people said, putting additional pressure on Boeing to make an equally aggressive bid.

American, now an all-Boeing operator, is interested in both Airbus's single-aisle family of A320 airplanes and a new-engine A320 variant that will start flying in 2015, those people said. Airbus is a unit of the European Aeronautics Defence & Space Co.

American also is evaluating Boeing's 737 family of airplanes, which include the 737-700 and 737-900, types that aren't currently in American's vast fleet. American has 152 737-800s in its fleet and more on order.

The Fort Worth, Texas, airline deliberations set up a showdown between the world's two largest aircraft makers at a time when China and Brazil are emerging as significant new rivals.

A purchase would replace American's oldest single-aisle jets, some 220 MD-80s that have an average age of 20 years, and some of its Boeing 757s, with an average age of 16 years. Retiring those planes would save fuel, cut maintenance expenses and give passengers a quieter, more reliable new aircraft. The airline has trimmed its number of airplane types to five from 14 in the early 1990s to boost efficiency and cut training and spare-parts expenses.

American hopes to resolve terms of the huge order this summer, these people said. The idea is not just to quickly replace American's MD-80s and older 757s, but to build in opportunities to grow should the airline industry's fortunes improve.

Also, such orders would put the carrier in position to be able to source next-generation technology offered by Airbus and Boeing in the future.

It is unclear whether either manufacturer alone would be able to satisfy the airline's goals, especially in a speedy five-year time frame, given the orders they already must fulfill for other customers.

But American's size, as the third-largest U.S. airline, is enticing both to work hard to win the entire order or at least share it, these people said.

The potential deal or deals would feature "heavy financing" assistance from the manufacturers or leasing companies, these people said, as AMR's balance sheet and credit rating are dented by massive losses over the past decade.

Airbus is offering American significant discounts, creative financing terms and other incentives such as assistance with training pilots and mechanics, stocking spare parts and handling the fleet transition, according to the people familiar with the discussions. But even giving these major concessions, Airbus could benefit commercially.

For Airbus, signing American Airlines as a customer would rank as a major victory. Airbus won some U.S. customers in the 1970s but the victories were short-lived as those early customers, including Pan American World Airways and Eastern Airlines, disappeared. American and Delta Air Lines Inc. flew early Airbus models, but retired them in favor of Boeing planes. US Airways Group Inc. currently is Airbus's biggest U.S. customer.

Industry consolidation has given Airbus new opportunities at the two largest U.S. carriers. Delta, an all-Boeing customer, acquired Northwest Airlines, an Airbus operator. And United Airlines, a mixed operator, merged with Continental Airlines, another all-Boeing customer. American and Southwest Airlines Co. are the only remaining major U.S. carriers not to fly any Airbus planes.

Winning over American would further endorse Airbus's A320neo [for New Engine Option], a variant that will enter service in 2015 and is designed to burn 15% less fuel than current A320 planes. The plane stole the spotlight at the recent Paris Air Show, landing 667 orders and commitments at the trade event.

The A320neo's success is increasing pressure on Boeing to tell airlines and investors what it plans to do with the workhorse 737 model. Boeing already has updated 737 engines twice. Company executives have said they plan to decide by year's end whether to update its engines again or develop an entirely new model.

Boeing and American have long, close ties. In the late 1990s, Boeing gave American and a few other key customers the equivalent of "most favored nation status"—offering special financial and delivery terms—to preserve their loyalty after Airbus began making inroads with the A320.

The carrier's 620-plane fleet is entirely Boeing models, from the international twin-engine 777 to the oldest MD-80s used on domestic routes. American still has 54 737-800s slated to enter its fleet by 2013, has more 777s on order and is a customer for Boeing's much-delayed 787 Dreamliner aircraft.