Boeing is turning up the heat on rival Airbus with two groundbreaking deals. The US manufacturer has signed American Airlines up to a 22-year exclusive pact and removed its only domestic rival by pulling in McDonnell Douglas to help in the design and development of future widebodies.
Reaction to the American deal, in which the US major will buy 103 aircraft for delivery by the year 2001 and holds purchase rights on another 527 aircraft for delivery by the year 2018, is mainly positive. Most bankers and analysts believe that the arrangement will work well for American, simplifying fleet planning decisions over the next two decades and giving it a firm long-term fleet structure to work with.
Details are scarce, and while Boeing is refusing to reveal what penalty clauses are attached to the purchase rights, it can only be assumed that in return for its exclusive commitment to Boeing, American has won deep discounts on the 500 B737-600/700/800s, 50 B757-200s, 50 B777s and 30 B767-300ERs included in the agreement. American chairman and CEO Bob Crandall says only that the deal gives broad price protection provisions.
Crandall dismisses the idea that effectively closing the door to any other manufacturer for two decades carries a risk. 'There has not before been a single manufacturer who has the range of aircraft that Boeing now has, and commonality of fleet is becoming more and more important.'
Crandall describes the deal as 'a completely new way of doing business' because of its major long-term commitment and because it introduces the concept of purchase rights instead of traditional options. The purchase rights guarantee a pre-set fixed price for the aircraft, which American can acquire with as little as 15 months' notice on narrow-bodies and 18 months on wide-bodies. This, American asserts, will give the flexibility to match replacement and growth orders with the industry's notoriously cyclical nature, without weakening its balance sheet. Andrea Shen, associate at Lehman Brothers, agrees: 'This is absolutely a good deal because it gives American maximum flexibility.'
Shen believes Boeing will pursue more customers with such deals and that Airbus will also follow suit. But NatWest Markets' Stephan Sayre says manufacturers will impose limits on such deals: 'The reality is that American is going to get a very good price, which Boeing will only want to offer to its best friends.'
Predictably, Airbus officials offer some of the few dissenting voices and doubt other carriers will follow. 'I think American is stupid,' comments one senior executive. 'They could have secured the pricing benefits without this commercial lock-in and they have put in jeopardy the shareholder benefits of healthy competition in aircraft transactions.' He argues the 15-month window is a misnomer as Boeing, which is hardly likely to decline any American order, needs only nine months to ramp up production for a purchase option.
In another coup for the Seattle-based manufacturer, McDonnell Douglas was set to sign a collaboration deal in January to participate on future Boeing widebody programmes, renewing speculation of a merger further down the road. The deal initially allows McDonnell Douglas to participate in the development of the B747-500X/600X. Several hundred McDonnell Douglas employees will move to Seattle to assist with engineering design and analysis.
Source: Airline Business
