U.S. Airlines May Be Left Behind in Updating Fleets

The nation's biggest airlines, back on firmer financial ground after a five-year slump, are eager to start replacing their aging fleets, but they face some major obstacles.

Among their biggest challenges: finding enough new planes to meet their needs, figuring out a way to pay for them and deciding how long they can afford to wait in line for delivery.

If they don't succeed, the consequences could mean more delays for air travelers.

During the slump that began in 2001, the major U.S. carriers sat on the sidelines, focusing on cost-cutting, while their foreign rivals went on a buying spree.

Now, production at Boeing and Airbus, the world's leading aircraft makers, is largely sold out until 2011.

Moreover, the biggest potential aircraft buyers in the U.S. American Airlines, United Airlines and Delta Air Lines would prefer "new generation" single-aisle planes that Boeing and Airbus haven't even designed yet, rather than derivatives of 737s and A320s that have been available for decades.

Another potential hitch: With their balance sheets battered by years of financial crisis, the big airlines aren't in a position yet to commit billions of dollars to buying planes over the next few years.

But if they don't start buying soon, many of their planes will be nearing 25 years old, the point where it typically makes more economic sense to replace them than to keep them.

Though those older planes can still fly safely, they develop more mechanical problems that can lead to flight delays and cancellations. They also tend to have noisier engines and lack passenger entertainment systems.

According to a recent analysis by Boeing, U.S. airlines will face an avalanche of aging airplanes beginning in 2012 if they don't start ordering this year and next for planes that would be delivered between 2009 and 2011.

The analysis supplied by Airclaims shows that major U.S. airlines now have a total of 126 airplanes that are 25 to 40 years old. Without new orders, that number is expected to grow to 384 airplanes by 2012, and as many as 840 by 2015.

To avoid piling on a mountain of debt all at once, U.S. airlines need to start replacing planes soon and in a steady but growing stream.

Otherwise they risk having both high debt and an elderly fleet as they try to manage the complicated task of integrating vast numbers of new planes.

American, United and Delta are pressing Boeing and Airbus to step up development of newer, more fuel-efficient aircraft, but those new models might not be ready until 2014 or beyond.

"We want to be very thoughtful about what is coming next before we order too many of the current generation," Tom Horton, American's chief financial officer, said at an investors conference in December.

However, neither Boeing nor Airbus sees a big leap in fuel efficiency or other new technology on the horizon that would justify the investment needed to produce successors to their 737 and A320 models, which are still selling well. Boeing last year won a record 739 orders for the venerable 737, a sign the model still has several years of life in the market.

By delaying their orders until new-generation aircraft were available, the big U.S. airlines would be taking a big risk.

In the years they were largely absent from the market, airlines in Asia, the Middle East and India have gobbled most available production slots for both single-aisle planes favored on domestic routes and twin-aisle planes used for long-haul flights.

All Nippon Airways and JAL International of Japan, Emirates and Singapore Airlines among the largest customers in terms of value of planes.

Boeing Chief Executive Jim McNerney recently said he expects some of the foreign carriers to come back for more, adding to Boeing's backlog.

Boeing, in particular, doesn't want to ramp up production to accommodate latecomers, and Airbus is preoccupied with problems on its mega-jumbo A380 and developing a new model to compete with Boeing's hot-selling 787.

For orders of any size, both manufacturers are quoting delivery dates that are years off. "Some of the carriers just don't realize how tight production has gotten," said John Leahy, chief commercial officer at Airbus.

Still, the big airlines are confident Boeing and Airbus would give them special consideration because of their size.

Jake Brace, United's chief financial officer, said he wishes United was on the Boeing 787 order book because that twin-aisle plane has the latest technology.

"The order book is full to 2012, and we are not on that list," he said. "But we think if we were ready to place a significant order, somehow we could find planes, even without a production increase."

Mel Fauscett, Delta's managing director of fleet planning and aircraft acquisition, says Delta and some other airlines have options they could exercise to get in line for new planes, and that the manufacturers might also be willing to rev up production to win big U.S. orders.

Moreover, "a lot of the airplanes ordered by emerging countries will never be delivered or built," he predicted. "Airlines are buying them for runways that haven't been built."

American, the world's largest carrier by traffic, has the most pressing need. Its 300 MD-80 jetliners in service are 17 years old on average, guzzle 20 percent more fuel than new 737s and lack audiovisual gear to entertain passengers.

They account for nearly half of American's 697-plane mainline fleet and are the workhorse of its domestic operations.

Late last year, American's parent acknowledged that one of its most significant challenges is devising a near-term plan to replace the MD-80s. The company said in its annual report, filed Friday, that it is considering replacing some of its older planes before 2013, but that its recent losses, heavy debt and poor credit rating may make it difficult to get financing.

Swapping those jets for Boeing 737s, assuming the airline could get that many, would cost nearly $10 billion.

United, the No. 2 airline, has somewhat more breathing room, having used a stay in bankruptcy court to restructure its fleet. Its oldest planes, 94 vintage 737s, won't start turning 25 years old until 2011, though 67 of them will hit that milestone by 2015.

"If we ordered today, we'd be putting in orders for old technology," said Brace, the United CFO. For now, he said, United's priority is strengthening its balance sheet.

Once Boeing and Airbus come up with new-generation models, United wants "to be right there at the front of the line" to place orders, he said.

Delta, which aims to emerge from bankruptcy-court protection in about two months, is shuffling jets around as it tries to shift more of its service to international markets, where competition isn't as fierce.

To reduce its capital commitments, Delta, which has 440 mainline jets that are 12 years old on average, has been selling Boeing delivery positions to aircraft-leasing companies.

Delta's Fauscett says his airline, with Boeing's blessing, has sold rights to 48 737s it had on order. Meanwhile, it has placed orders for 10 smaller 737s and is taking over the leases on 13 American 757s.

Continental Airlines and Southwest Airlines continued to take new jets in the past few years and now have the youngest fleets about nine years old on average among the nation's major carriers.

Northwest Airlines, poised to emerge from bankruptcy proceedings in the next few months, kept receiving new planes during its reorganization.

Even so, Northwest has the oldest fleet in the U.S. 18 years old on average and needs to tackle replacing the 69 DC-9s it owns that are 35 years old, according to Fitch Ratings.



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