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Aviation History
1998
1998 - 1906.PDF
American is building its long-haul strategy around the Boeing 777-200. The airline plans ultimately to operate as many as 50 of the aircraft Quicksilver machine GUY NORRIS/DALLAS-FORT WORTH WITHIN THE NEXT five years, the combined fleets of American Airlines and its regional affiliate, American Eagle, will number almost 1,000, of which the vast majority will be jet powered. Managing these huge fleets, and restructur ing diem to meet die changing needs of die 21 st century, has become as crucial to the future of parent company AMR as forging alliances and fending off competition. For American, the sin gle most important deal in recent times is there fore the exclusive supplier agreement that it struck with Boeing in late 1996, the first fruits of which American is about to enjoy. Similar to the controversial deals that Boeing signed with Continental Airlines and Delta Air Lines, the carefully constructed agreement allows American to change the type of aircraft model late in the day, and guarantees purchase prices at fixed levels over 2 0 years. This arrange ment gives the airline greater flexibility by allowing it to tailor new capacity to changing market conditions and greatly simplifies the financial planning for, as well as reducing the uncertainty of, fleet acquisition. Gerard Arpey, American's senior vice-presi dent of finance and planning, describes the Boeing fleet deal as the "linchpin" of its strategy for the future. "It will improve our ability to manage the fleet over the next 20 years and it gives us flexibility," he says. "We will have the best terms available in the industry and we will be able to acquire aircraft on much shorter notice." The promise of stable capital expenditure and the chance to swap and change models on demand is a world away from the difficult years of the late 1980s and early 1990s. "The last 10 years have been very turbulent for AMR," says Arpey. By 1992, the corporation's debt to equi ty ratio was up to 83%, prompting the invest ment community to rate all major US carriers, American included, as "junk" bonds. American Airlines and its regional partner, American Eagle, are re structuring their fleets ready for the 21st century Three become two as tri-jets are replaced by twins "Therefore we became a non-investment grade debt, so the cost of getting money went up as a result," says Arpey. "The industry was sim ply not sustainable any more." While the likes of Continental went into bankruptcy, AMR forged a recovery strategy called the transition plan. This three-part poli cy required AMR to invest in its core airline business, shrink the carrier where it could not operate profitably and grow non-airline man agement businesses such as the AMR Global Services and AMR Investment Services groups. "We significandy chopped back on our capi tal expenditure, which went from $3 billion in 1992 to $ 1 billion in 1994 and less than $ 1 billion in 1995," says Arpey. "By mid-1996, we had no aircraft on order for the first time since 1973." FLEET DEAL The Boeing fleet deal therefore came at a good time for American which, having cleared the decks of odier commitments, was in a position to take advantage of both the market upturn and the availability of newly developed aircraft such as the Next Generation 737 and the 777. The guarantees provided by the Boeing deal are only part of the protection and careful hus banding that die airline knows is needed if it is to ride out the next, seemingly inevitable, down turn. Total capital expenditure was $6 billion over the past five years, yet will be $12 billion between now and 2003. "So we're going to spend twice as much and we have to do that in an environment where industry growth will begin to outpace gross domestic product for the first time in many years," warns Arpey. "So it's not going to be easy sustaining our earnings at the current level." The phasing-out of the Boeing 727 and McDonnell Douglas DC-10 tri-jet fleets is con tinuing, although recent deals with both FedEx (hushkits) and Raisbeck Engineering (aerody namic modifications) mean that the 727-200 will continue to be part of the American fleet to 44 FLIGHT INTERNATIONAL 15 - 21 July 1998
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