Cash-poor U.S. airlines may face huge plane bill

US Airways officials went to the Paris Air Show last month and did something executives at most big U.S. carriers haven't done in years. They ordered planes: 92 new Airbuses at an estimated cost of $10 billion.

After a brutal half-decade in which the USA's airlines rang up $35 billion in losses, they're again profitable. But, US Airways' order notwithstanding, the little money they're making isn't nearly enough to cover what they'll need to rejuvenate and enlarge their fleets in the next two decades.

If projections by the plane-making giants, Airbus and Boeing, are to be believed, U.S. airlines could need as many as 9,000 new jets in the next 20 years. That could cost the industry nearly $1 trillion.

The high cost of fleet replacement and expansion will add to the financial pressures that already weigh heavily on the airlines, including the pressure to raise fares. But failure to launch the enormously expensive process soon could relegate the big U.S. carriers to flying antiquated aircraft for years while their foreign and low-cost domestic competitors fly newer, more fuel-efficient jets.

The planes flown by the USA's six largest conventional network carriers are now, on average, 13.3 years old, according to industry tracker Back Aviation Solutions. That's the oldest ever for this group of airlines.

"The situation with these very old planes is starting to get serious," says Michael Roach, a veteran consultant who co-founded America West Airlines in the 1980s. If the big U.S. carriers that haven't resumed buying planes don't do so soon, "they may never get out of the hole they're in."

Roach notes also that U.S. carriers have never operated their planes more intensively, getting more hours of flight out of them and packing more people into them than ever before. Their planes are, in the vernacular of the cowboy, being "rode hard and put up wet."

Yet, with only a couple of exceptions, the big U.S. airlines are still financially hamstrung by the huge losses of the post-9/11 era.

Airline executives acknowledge they face a daunting, but not insurmountable, task.

"It's a multiyear process,'' says Tom Horton, CFO at American, the world's largest carrier. "It took us five bad years to get where we were; it'll take awhile for us to get back on firm footing."

Among the big carriers, Northwest Airlines has the oldest fleet as measured by average age: 18 years, according to the company. Continental has the youngest by that measure: nine years.

Good maintenance can keep planes flying safely for 30 years or more, but after a point, the upkeep is more expensive than buying new ones, says Randy Baseler, who earlier this year retired as Boeing's chief airplane salesman. The big U.S. airlines, he says, "are starting to get themselves in a bind. If they don't start taking deliveries now, they're never going to get caught up. They could end up with an even larger fleet that needs replacement in an even more desperate way."

Had Baseler not stayed so busy selling Boeing airplanes to foreign airlines in the years before his retirement, his argument that U.S. airlines are falling behind could be dismissed as an empty sales pitch.

But all those foreign sales in recent years are pushing the U.S. carriers further back in the delivery line when they do get around to placing orders.

Twenty years ago, U.S. carriers could be counted on to absorb nearly half the world's commercial aircraft production. That gave them preferred customer status. Today, Boeing and Airbus expect U.S. carriers to buy a quarter to a third of their future output, giving them less clout with the plane makers.

Wall Street expects U.S. airlines this year to register a second year of profitability since the post-9/11 industry crash: $6 billion before taxes, interest and accounting items. But that pales in the face of the estimated $715 billion to $950 billion worth of new planes that the manufacturers estimate U.S. carriers will need to replace and enlarge their fleets to meet travel demand. The government forecasts that the number of air travelers in the USA will double in the next two decades.

Other looming costs could easily push the airlines' essential capital outlays above $1 trillion in the next two decades. The expected increase in passengers will, for example, require more spending on terminals, training facilities and other essential infrastructure.

In addition, the Federal Aviation Administration says airlines will have to spend $20 billion to $25 billion in coming years to equip cockpits for the coming "NextGen" air traffic control system.

It's money the airlines simply don't have.

Lingering impact

Troubles that started with the recession and terrorism of 2001 severely limited the ability of the big U.S. carriers to update fleets, their largest capital investment and the heart of their business.

Most U.S. airlines remained on the sidelines the past few years while global sales of commercial jetliners boomed. They focused on restructuring and cost cutting, with four of the six large traditional carriers -- United, Delta, Northwest and US Airways -- going through Chapter 11 bankruptcy since 9/11.

But because of the worldwide scramble for new airliners, waiting to begin fleet replacement and expansion is a fast-expiring option for U.S. carriers. Boeing and Airbus are mostly sold out through 2010, with some models effectively sold out into 2013.

Any carrier that fails to get in line soon could end up flying lots of old, fuel-guzzling, maintenance-intensive planes. Boeing's Baseler points out that with a typical delivery rate of two per month, American would need 15 years to completely replace its 300 MD-80s, 1980s-era jetliners that compose about 45% of its fleet.

American provides perhaps the best example of the pressure that carriers are under to begin fleet renewal and expansion. Executives are loath to spend money on new planes because they don't believe the industry's economics currently justify such investments. But at 14 years average age, the fleet of 672 big jets is getting long in the tooth.

In March, American decided it couldn't wait any longer to replace its oldest planes and said it will move up delivery of 47 previously ordered Boeing 737s that it had delayed almost indefinitely after the 9/11 terror attacks. That's "the first bite at replacing the MD-80s," says CFO Horton. The first nine of the new 737s are scheduled to join the fleet in early 2009.

Horton said American would prefer to wait until Boeing offers a more fuel-efficient, mostly composite replacement for the 737 design. But Boeing President Scott Carson said at the Paris Air Show that the 737's replacement won't fly for at least another seven years.

The trick for American, Horton says, will be to "find the sweet spot" between ordering more 737s and ordering the 737's eventual replacement. At the same time, it likely will have to decide soon whether it can afford to begin replacing its aging Boeing 767 fleet with Boeing's popular and futuristic 787 Dreamliner.

Not all big carriers face the same challenge. Continental continued to take deliveries of new planes in the post-9/11 era and has the youngest fleet of the bunch. Average age: less than 10 years. It has orders for 85 more Boeing planes. Still, it needed to secure its place in the already long delivery line for Dreamliners to avoid being stuck 15 years from now with uncompetitive old planes. That's why it ordered 20 Dreamliners in late 2004, and raised that order to 25 in May.

The 787 is scheduled to fly for the first time later this year and enter commercial service in 2008. The first three won't join Continental's fleet until 2009; the last five not until 2013.

"Normally, we wouldn't commit to aircraft as far out into the future as we committed to those last five 787s. But when we saw the demand being what it had become, we decided to go ahead," says Gerry Laderman, Continental's treasurer and vice president of finance.

Southwest, the industry's profit leader, never stopped ordering planes. It has orders for 285 Boeing 737s, although in June it announced plans to defer delivery of 15 of the 34 it previously expected to pick up in 2008.

But the rest of the big U.S. carriers remain, for now, mostly on the sidelines.

Northwest ordered 18 Dreamliners two years ago, and expects to take delivery later this year of the last of 32 new Airbus A330 wide-bodies. But it still has, by far, the oldest fleet in the industry, with an average age of about 18 years.

United, with an average fleet age of 12 years, has no planes on order. Delta, with planes averaging 11 years old, has 55 planes on order, but doesn't want them and has lined up buyers to take them off its hands once they're delivered. But it will keep ten 777s it has ordered.

Big airlines blocked?

Based on their cyclical history of modest profits followed by huge losses, big airlines would seem boxed in by a need for new planes and an inability to pay for them.

But Roach, the industry consultant, says that it would be "idiotic" to think that all the USA's carriers will disappear as their current planes wear out. "There will always be an air transportation system. It is too vital to the country's interest for it to be otherwise," he says. The more apt question, he says, is "Where will the money come from" to acquire those planes?

Southwest, with the deepest financial resources in the industry and strong annual cash flows, expects to continue buying most of its planes with cash generated by its operations, says CFO Laura Wright.

For many U.S. carriers, that's not an option they can rely on. Now, they'll have to get by with a little help from their friends: leasing companies.

It used to be that when the big U.S. airlines leased planes -- typically via long-term deals that were nothing more than alternate ways of purchasing planes -- they did so mainly for tax savings. Today, they increasingly are turning to leasing because they lack the cash or the strong credit ratings to finance conventional plane purchases.

And thanks to the strong worldwide demand for popular models from Boeing and Airbus, there's no shortage of companies willing to finance them, even for carriers whose profits are unimpressive or non-existent. Aircraft lessors are confident that should a customer default on a lease, they'll have no trouble finding other carriers to lease their planes.

"There're plenty of people out there willing to finance airplanes," Baseler says. "Actually, at Boeing, we're amazed at just how easy it is to finance new planes.

American's Horton says, "Some people marvel that the airline industry has access to as much capital as it does, given its capacity to reduce value for investors."

But he disagrees with the notion that bottom-line profits don't matter much. "There's a whole lot of reasons you can finance planes today without being profitable. But, in the long run, I still think our industry is going to have to have profits if it's going to make its way." How much does an airplane cost?

List prices of popular passenger jets (in millions):

Boeing

737-800

$70.5 to $79.0

767-300ER

$141.0 to $157.5

787-8

$157.0 to $167.0

747-400

$228.0 to $260.0

777-300ER

$250.0 to $279.0

Airbus

A320

$69.3 to $76.5

A330-200

$167.7 to $176.7

A340-500

$222.9 to $230.8

A380

$304.4 to $334.0

A350-800XWB

$196.5 to $202.0

Sources: The companies

How the big airlines stack up in fleet orders

Big U.S. airlines face big expenditures for fleet expansion and renewal. The outlook for each:

Airline Fleet size Avg. age (in years) Where things stand

American 672 14 Recently said it will move forward the delivery dates on 47 previously ordered Boeing 737s with first deliveries now scheduled for early 2009.

Continental 367 9 Took deliveries of new planes even in the post-9/11 era, and has placed firm orders for 60 Boeing 737s and 25 787s.

Delta 440 11 Has ordered 55 Boeing 737s but plans to resell them. Has ordered 10 Boeing 777s.

Northwest 362 18 Took delivery of new planes during its Chapter 11 bankruptcy. This year, it will get its 32nd, and last Airbus A330 long-range wide-body. On order: 18 Boeing 787s, plus 72 76-seat regional jets that will be flown in mainline service as replacement for 100 DC 9s on some routes. Still must decide on replacement of 109 DC-9s used on more popular domestic routes. Those DC-9s average about 35 years in age.

United 460 12 Hasn't taken delivery of a new full-size jet since October 2002, and has no orders in place.

US Airways 358 12 Ordered 92 Airbus planes in June, most for delivery after 2010. Already had 57 planes scheduled for delivery before 2011. New planes are mostly replacements.

Southwest 494 9 Has orders and options to acquire 285 new Boeing 737s through 2014, and has commitments to buy two used 737s later this year. No current plans to retire older 737s, but is deferring 15 of 34 previously scheduled for delivery in 2008.

Sources: the airlines, USA TODAY research


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