BUSINESS JUNE 4, 2009
United Plans Huge Jet Order
Boeing, Airbus to Vie for Possible Purchase Worth $10 Billion; Exploiting the Slump
By SUSAN CAREY
United Airlines has asked Boeing Co. and Airbus to propose dueling bids for up to 150 new airliners -- the latest example of major companies exploiting the recession to bargain-hunt.
For the two aircraft makers, the deal could be worth more than $10 billion at a time when both are watching other customers cancel or defer orders. By staging a winner-take-all competition, United's parent, UAL Corp., is hoping to obtain better terms than otherwise might be available, according to people familiar with the situation.
It's a notable move amid falling travel demand and a tight lending environment -- on top of UAL's recent heavy losses and poor credit rating. But even in good times aircraft builders will go to considerable lengths to lock in an order, using in-house financing arms and other maneuvers to help airlines buy. Their goal: Ensure a steady appetite for their product in the notoriously volatile airline business.
United is among myriad companies attempting to use the economic downturn -- and in some cases, lower steel and other commodity costs -- as a chance to expand or land better pricing. In February, chip maker Intel Corp. said it would spend $7 billion over two years to expand three U.S. plants. German discount retailer Aldi plans to add 75 U.S. stores this year, far more than usual, to appeal to cash-strapped consumers.
Exxon Mobil Corp. in March said it would raise spending on exploration and production in 2009 by 11%, to $29 billion, despite tumbling oil prices.
Others are playing hardball with suppliers. Louise O'Sullivan of Prime Advantage, a buying consortium for industrial-equipment makers, said her group's spring meeting had surprisingly strong attendance. "Some of the biggest [members] were there with grins on their faces," she said, because it "gave them the chance to hammer 40 to 60 of their suppliers in two days."
United has taken pride in its lack of aircraft orders in recent years, even as U.S. rivals started reopening their checkbooks. By ordering now, in the downturn, it hopes to be able to start taking delivery of the planes in a few years, when the economy is better. In the past, airlines have gotten stung by placing orders in good times, then having too many planes in a downturn.
United, which has a total fleet of 400 jetliners, sent a formal request to Boeing and Airbus on Tuesday, people familiar with the matter said. The request focuses on replacing many of United's 111-airplane wide-body fleet, as well as some of its 97 aging Boeing 757 narrow-body planes, these people said.
Chicago-based United has hired aviation consulting firm Seabury Group LLC to help it negotiate with the builders.
Unlike some of its largest domestic rivals, United already flies both Airbus and Boeing planes, giving both manufacturers an incentive to try to grab a bigger share of a major airline's business. As part of its order, United is hoping to simplify its fleet by ending up with fewer different types of aircraft, a change that would cut its maintenance and crew-training costs.
A spokesman for Airbus, a unit of European Aeronautic Defense & Space Co., declined to confirm or deny United's request. A Boeing spokesman declined to comment.
United could sign a major order as early as the fall, the people familiar with the matter said, if Boeing or Airbus agree to certain conditions. The most crucial would be financing arranged by the manufacturer that doesn't eat into United's cash, these people said. United also wants the flexibility to change the order later, according to these people.
By placing a firm order, an airline is committing to a buying and price schedule that stretches for years. However, contracts typically allow airlines to wriggle out of those deals with limited penalties.
If pitting Boeing and Airbus against each other doesn't yield a deal acceptable to United, the airline can wait because its fleet is, on average, a relatively young 13 years old. It already has retired more than half of its elderly Boeing 737s and plans to rid itself of the rest by year's end.
Boeing and Airbus still have multiyear order backlogs. But last year's spike in oil prices, along with the recession and financial crisis, brought on a series of order deferrals and a few outright cancellations by customers around the world.
Airbus in February said it would cut deliveries of its popular A320 narrow-body model to 34 a month from 36, starting next year. It originally had intended to ramp up to 40 units a month by 2010. In April, Boeing said it would trim its wide-body 777 production next year to five planes a month from seven.
For years, aircraft orders by major U.S. airlines were relatively rare. Following the 2001 terror attacks, carriers struggled with restructuring and bankruptcy. Overseas carriers did better, flooding manufacturers with orders. Carriers covet the fuel-efficiency of newer aircraft. The new models also let them cover routes they can't with existing planes.
U.S. orders have started to revive. AMR Corp.'s American Airlines, No. 2 in the U.S. by traffic, last fall announced its intention to order up to 100 Boeing 787 jetliners, if it can win agreement with its pilots' union on pay and other issues. This spring, American revved up deliveries of new 737-800s to replace some of its geriatric workhorse MD-80s.
United has been the odd man out since emerging from Chapter 11 bankruptcy protection in early 2006. In several conference calls with investors, as recently as April, it stressed that it had no new planes budgeted.
Wall Street Journal
http://online.wsj.com/article/SB124408456205084093.html
United Plans Huge Jet Order
Boeing, Airbus to Vie for Possible Purchase Worth $10 Billion; Exploiting the Slump
By SUSAN CAREY
United Airlines has asked Boeing Co. and Airbus to propose dueling bids for up to 150 new airliners -- the latest example of major companies exploiting the recession to bargain-hunt.
For the two aircraft makers, the deal could be worth more than $10 billion at a time when both are watching other customers cancel or defer orders. By staging a winner-take-all competition, United's parent, UAL Corp., is hoping to obtain better terms than otherwise might be available, according to people familiar with the situation.
It's a notable move amid falling travel demand and a tight lending environment -- on top of UAL's recent heavy losses and poor credit rating. But even in good times aircraft builders will go to considerable lengths to lock in an order, using in-house financing arms and other maneuvers to help airlines buy. Their goal: Ensure a steady appetite for their product in the notoriously volatile airline business.
United is among myriad companies attempting to use the economic downturn -- and in some cases, lower steel and other commodity costs -- as a chance to expand or land better pricing. In February, chip maker Intel Corp. said it would spend $7 billion over two years to expand three U.S. plants. German discount retailer Aldi plans to add 75 U.S. stores this year, far more than usual, to appeal to cash-strapped consumers.
Exxon Mobil Corp. in March said it would raise spending on exploration and production in 2009 by 11%, to $29 billion, despite tumbling oil prices.
Others are playing hardball with suppliers. Louise O'Sullivan of Prime Advantage, a buying consortium for industrial-equipment makers, said her group's spring meeting had surprisingly strong attendance. "Some of the biggest [members] were there with grins on their faces," she said, because it "gave them the chance to hammer 40 to 60 of their suppliers in two days."
United has taken pride in its lack of aircraft orders in recent years, even as U.S. rivals started reopening their checkbooks. By ordering now, in the downturn, it hopes to be able to start taking delivery of the planes in a few years, when the economy is better. In the past, airlines have gotten stung by placing orders in good times, then having too many planes in a downturn.
United, which has a total fleet of 400 jetliners, sent a formal request to Boeing and Airbus on Tuesday, people familiar with the matter said. The request focuses on replacing many of United's 111-airplane wide-body fleet, as well as some of its 97 aging Boeing 757 narrow-body planes, these people said.
Chicago-based United has hired aviation consulting firm Seabury Group LLC to help it negotiate with the builders.
Unlike some of its largest domestic rivals, United already flies both Airbus and Boeing planes, giving both manufacturers an incentive to try to grab a bigger share of a major airline's business. As part of its order, United is hoping to simplify its fleet by ending up with fewer different types of aircraft, a change that would cut its maintenance and crew-training costs.
A spokesman for Airbus, a unit of European Aeronautic Defense & Space Co., declined to confirm or deny United's request. A Boeing spokesman declined to comment.
United could sign a major order as early as the fall, the people familiar with the matter said, if Boeing or Airbus agree to certain conditions. The most crucial would be financing arranged by the manufacturer that doesn't eat into United's cash, these people said. United also wants the flexibility to change the order later, according to these people.
By placing a firm order, an airline is committing to a buying and price schedule that stretches for years. However, contracts typically allow airlines to wriggle out of those deals with limited penalties.
If pitting Boeing and Airbus against each other doesn't yield a deal acceptable to United, the airline can wait because its fleet is, on average, a relatively young 13 years old. It already has retired more than half of its elderly Boeing 737s and plans to rid itself of the rest by year's end.
Boeing and Airbus still have multiyear order backlogs. But last year's spike in oil prices, along with the recession and financial crisis, brought on a series of order deferrals and a few outright cancellations by customers around the world.
Airbus in February said it would cut deliveries of its popular A320 narrow-body model to 34 a month from 36, starting next year. It originally had intended to ramp up to 40 units a month by 2010. In April, Boeing said it would trim its wide-body 777 production next year to five planes a month from seven.
For years, aircraft orders by major U.S. airlines were relatively rare. Following the 2001 terror attacks, carriers struggled with restructuring and bankruptcy. Overseas carriers did better, flooding manufacturers with orders. Carriers covet the fuel-efficiency of newer aircraft. The new models also let them cover routes they can't with existing planes.
U.S. orders have started to revive. AMR Corp.'s American Airlines, No. 2 in the U.S. by traffic, last fall announced its intention to order up to 100 Boeing 787 jetliners, if it can win agreement with its pilots' union on pay and other issues. This spring, American revved up deliveries of new 737-800s to replace some of its geriatric workhorse MD-80s.
United has been the odd man out since emerging from Chapter 11 bankruptcy protection in early 2006. In several conference calls with investors, as recently as April, it stressed that it had no new planes budgeted.
Wall Street Journal
http://online.wsj.com/article/SB124408456205084093.html
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