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 restructuring them to meet the changing needs of the 21st century, has become as crucial to the future of parent company AMR as forging alliances and fending off competition. For American, the single most important deal in recent times is therefore 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 20 years. This arrangement 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-president 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 equity ratio was up to 83%, prompting the investment community to rate all major US carriers, American included, as "junk" bonds.
"Therefore we became a non-investment grade debt, so the cost of getting money went up as a result," says Arpey. "The industry was simply not sustainable any more."
While the likes of Continental went into bankruptcy, AMR forged a recovery strategy called the transition plan. This three-part policy required AMR to invest in its core airline business, shrink the carrier where it could not operate profitably and grow non-airline management businesses such as the AMR Global Services and AMR Investment Services groups.
"We significantly chopped back on our capital 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 other 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 husbanding that the airline knows is needed if it is to ride out the next, seemingly inevitable, downturn. 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 continuing, although recent deals with both FedEx (hushkits) and Raisbeck Engineering (aerodynamic modifications) mean that the 727-200 will continue to be part of the American fleet to 2004 and possibly slightly beyond. The original batch of FedEx hushkits, obtained in part exchange for DC-10s, will be used on 22 of the later Pratt & Whitney JT8D-17-powered versions. The balance of the 727 fleet, 52 aircraft, will receive the Raisbeck Stage 3 modification.
The last DC-10s, on the other hand, are proving more troublesome to replace, and American is not expected to decide on their direct successor or the retirement schedule until the end of this month. Despite disposal of most of the fleet to FedEx, American is still flying 13 DC-10-10s and five -30s. The -10s are used on transcontinental trunk routes and, according to executive vice-president of operations Bob Baker, are likely to be replaced by some of the airline's 35 Airbus Industrie A300-600Rs.
Baker says the A300-600Rs are "not perfect" for this role, however, although they have proved to be ideal workhorses for other parts of the network, such as the Caribbean. A longer term replacement is still being sought for both the transcontinental routes and some longer haul but low yield routes such as Dallas/Fort Worth and Chicago to Hawaii. DC-10-30s now flying on these routes will probably be retired "within four years", says Baker.
BIG WISH
"We want a big aircraft with lots of seats that is cheap to operate," he adds, pointing out that both the newly developed 757-300 and soon-to-be-built 767-400 are in the frame. American has 90 757-200s in service and will operate a fleet of 102 by 1999. The airline has been in discussion with Boeing about the -300, but seems anxious to see how the long narrowbody fares in operation with initial customers such as Condor before deciding. "We operate the 757-200 [on the relatively long sector] from Los Angeles to Maui in Hawaii with no problems," says Baker.
Commonality between the airline's 767 fleet and the -400 make the new widebody an equally attractive option, says Baker. American expects to be operating up to 79 767s (30 -200s and 49 -300s) by 1999 and has reserved delivery positions which could be converted into -400 slots beyond 2000.
American's Boeing MD-11 fleet, meanwhile, is earmarked for gradual disposal as the 777-200s begin to arrive from January 1999 onwards. Of the 13 in service, five will be transferred to FedEx by 2000, with the rest to follow by 2003. The 777 fleet is building up rapidly, with 19 set to be in service by 2001 and as many as 31 expected to follow, depending on the market and American's alliance plans, which strongly dictate its international capacity requirements. A key element of its plans is the proposed 777-200X, of which American continues to be a major supporter. The ultra-long range of the -200X, which will be able to fly non-stop from Dallas/Fort Worth to Tokyo and other Asian destinations, is fundamental to the airline's proposed route network from 2003.
The only other all-new type to be introduced is the 737-800. American plans to take 100 Next Generation 737s from 1999, when the first of 24 will enter service. The full fleet should be in service by the end of 2003, says Baker. The -800 will mainly replace the 727-200 and supplement the Boeing MD-80 and Fokker 100 fleets. American has no immediate plans to alter the size of its 260-strong MD-80 fleet, which continues to be the mainstay of its domestic network. The Fokker 100 fleet, similarly, is not earmarked for change until at least 2004, and numbers will remain at 75.
With American's fleet due to peak at 725 aircraft in 2001 and theoretically to be reduced to around 700 aircraft by 2004 (after the final 727 and DC-10 retirements), the airline is confident that it will still have room to manoeuvre even if another recession bites deeply. "You always worry you will grow into the teeth of a downturn, but you have got to keep capacity in line with competition," says Baker. Should the bad times return, American says it "-can ground the DC-10s and move some MD-80s out".
FLEET GROWTH
"We've got a lot of ability to lower our exposure while bringing in more efficient aircraft like the 737," adds Baker. "We are not leveraging the company in a big way here."
Meanwhile, further fleet growth is likely, particularly if the alliances with British Airways and other international partners are sanctioned. "I'd expect to see more things happening in the international arena," says Baker, "and I don't think this is the final plan, particularly from 2002, when you'll see some more activity."
STREAMLINING THE EAGLE
While its big brother wrestles with the big airliners, American Eagle is quickly growing into a "big" jet operator of another sort. The regional carrier now operates a fleet of 205 aircraft, only six of which are Embraer RJ-145 regional jets. The proportion of jets will quickly accelerate, however, as more ERJ-145s and, from 2001 onwards, Bombardier Canadair Regional Jet (CRJ)-700s begin service.
The scales are expected to tip in favour of turbofans a year or so later when the first of an expected purchase of up to 150 smaller ERJ-135s enters service.
The regional jet revolution has come at a perfect time for American Eagle, which is close to finalising its "single carrier project". Under this plan, the four original Eagle carriers - Executive Airlines, Flagship, Simmons and Wings West - have been merged into a single entity.
The consolidation, which American Eagle president Dan Garton says is "transparent" to passengers, will produce a single seniority list for pilots and help ease the introduction of regional jets. The resulting single airline carried 12.1 million passengers in 1997, with revenues of $1 billion.
As part of the consolidation, the fleet is being simplified from 260 aircraft of six types in 1995 to 205 of four types this year. Aircraft retired included 44 British Aerospace Jetstream 32s and 21 Shorts 360s. New purchases included 12 ATR 72s and 42 ERJ-145s (plus 25 on option), as well as 25 CRJ-700s (plus 25 on option). Up to 22 ERJ-145s will be in service by the end of 1998 and a further 20 will enter service the following year.
With ERJ-135s on the horizon, the airline is now considering the fate of its 115-strong Saab 340 fleet. Officially, the airline has yet to even announce the ERJ-135 order, so it declines to discuss either its plans for the introduction of the smaller jet, or the knock-on effect on its Saab fleet.
For the moment, Garton says: "We're looking at how we will continue to use regional jets, both by replacing turboprops and opening long, thin routes." The ERJ-145s are already proving their worth in opening up new hub-to-hub routes, such as Duluth, in Minnesota, to Chicago.
American Eagle's future is banking on jets of all sizes, as Garton explains: "As we envision a fleet that is predominantly jet, or even an all-jet fleet make-up, it makes sense that we will be looking at large, mid-size and small size jets."
AMR as a whole is engaged on a similar exercise. New American chairman and chief executive Don Carty says: "While the 777s will extend our reach overseas, the emergence of the regional jet will, in our view, revolutionise airline competition in smaller markets here in the USA."
Source: Flight International
