American May Retrofit its Md-80s with New Engines

May 11--Fort Worth-based American Airlines Inc. is studying putting new engines on its fleet of nearly 300 MD-80 aircraft to save money on fuel, chairman and chief executive Gerard Arpey told investors Wednesday.

"We have -- and are exploring -- some options," to replacing the JT8D engines from Pratt & Whitney on the MD-80s, Mr. Arpey said at an airline conference in New York.

"We have not been able to come up with an engine replacement that makes both technical sense and economic sense as we sit there today, but we've got people working on it," he said.

At the same Bear Stearns conference, Dallas-based Southwest Airlines Co. said it was progressing on its goal to increase earnings 15 percent this year, despite higher fuel costs.

"We continue to be encouraged by our revenue trends," said Laura Wright, Southwest's chief financial officer. "Our new markets continue to perform well."

At American, replacing hundreds of engines would be costly, but still considerably cheaper than buying a new fleet of single-aisled planes from either Boeing Co. or Airbus Industrie.

New-generation engines would be more fuel-efficient. But they would cost several million dollars each, and modifications to fuel systems and electronic components would potentially add millions more per aircraft.

New Boeing 737s have list prices of $45 million to $77 million each, though carriers typically get discounts.

With jet fuel prices at record highs, the economics of replacing American's MD-80s haven't reached the point where the world's biggest carrier would be better off with new planes, Mr. Arpey said.

American has no plans to retire its MD-80s, most of which have many more years of useful life even with the fuel-thirsty engines. The MD-80s are the most common aircraft in American's fleet of 683 mainline jets.

The McDonnell Douglas airframes are very sturdy. Rival Northwest Airlines Inc. has successfully flown planes that are similar, McDonnell Douglas DC-9s, for as much as 40 years.

Aside from fuel, American's outlook remains encouraging against a backdrop of frothy demand for air travel.

"We have re-established a revenue premium to the rest of the industry," he said, meaning that American is getting a better share of traffic at higher prices than other carriers. "But revenues are still a far cry from where they were just a few years ago."

Southwest's fuel-cost advantage over other carriers is diminishing as its contracts to pre-purchase fuel at lower prices expire.

Southwest has purchased about 75 percent of its jet fuel needs for this year at prices equivalent to $30 a barrel of crude oil. Crude oil for delivery next month closed Wednesday at $72.13 a barrel, up $1.44.

As the fuel protection dwindles, Southwest also faces cost pressures with its employees.

The airline will start talks with its pilot groups about new contract terms in June. Southwest's pilots are among the highest paid in the industry, and they are also the most productive.

Southwest's alliance with ATA Airlines Inc. has produced solid revenue as the two carriers sell seats on each other's flights. Southwest will at some point sell seats on ATA's international flights as the alliance expands.

"Frankly, we're counting on it," said John Denison, ATA's chief executive officer, at the same panel with Southwest's Ms. Wright. Mr. Denison is a former Southwest executive.

ATA emerged from bankruptcy reorganization last year as a much smaller airline with a focus on leisure markets, and flies into several markets Southwest doesn't serve.

Shares of AMR Corp., parent of American, fell 98 cents to $27.78. Southwest shares fell 12 cents to $16.44.