This Boeing 787 is Just the Beginning for American Airlines

By Markets Fool.com

The Boeing 787 is one of the most popular planes among airlines and passengers today as new routes featuring the passenger jet are opened. Recently, American Airlines Group took delivery of its first Boeing 787. In this article I'll look at where it is flying and what the Boeing 787 program means for this major airline.

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Fleet modernization
As part of American Airlines' cost reduction strategy, the company has been on an aircraft buying spree. In late 2008, the airline placed its order for 42 787 Dreamliners with rights to acquire 58 additional 787 Dreamliners. And in 2011, shortly before its bankruptcy filing, American placed one of the largest aircraft orders in history for 460 narrowbody aircraft.

American Airlines Boeing 787 Dreamliner. Source: American Airlines.

With the potential to acquire up to 100 units of this model, American is making the Boeing 787 a large part of its strategy. As with most fleet modernizations, the primary goal is to reduce fuel consumption. And there is significant fuel savings potential -- Boeing estimates the 787 consumes 20% less fuel than similar existing aircraft such as the Boeing 767.

This fits with the reasoning behind the overhaul of American's narrow-body fleet with new versions of the Airbus A320 and Boeing 737. In both cases, the manufacturers boast significant fuel consumption reductions compared to currently operating aircraft of similar size which, in most cases, are older 737s and A320s.

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Unlike most other airlines, American Airlines Group does not hedge its fuel costs, making fluctuations in this expense particularly critical to the company. American Airlines hasbenefitedthe most among major U.S. airlinesfrom the recent drop in fuel prices,but it is also exposed to any potential rise in this cost.

Once the fleet modernization program nears completion around the end of the decade, American Airlines will have one of the youngest fleets in the industry, helping it to reduce airlinewide fuel consumption and thus financial risk from spikes in fuel costs.

If the airline can cut fuel usage by 10% by adding these new planes, most of which have 15%-20% fuel savings over similar existing aircraft, then it would save approximately 440 million gallons of fuel per year based on the 4.4 billion gallon estimate from American's 2013 10-k form. At the latest Gulf Coast Jet Fuel price of $1.79 per gallon, this would mean a $790 million annual savings for the airline. Of course, there will be other factors that come into play including route changes and the possible substitution of one size of aircraft for another but this number can serve as a general estimate.

Passenger experience
The Boeing 787 is more than a tool of fuel and maintenance savings,it's also poised to provide an improved passenger experience.

Business Class in American Airlines' 787. Source: American Airlines.

In business class, the airline is putting in lie-flat seats complete with 15.4-inch touchscreen monitors, along with universal AC outlets and USB ports at each seat. The main cabin seats are also tech-loaded with individual 9-inch touchscreens, AC power outlets, and USB ports. Additionally, the plane is equipped with satellite W-Fi and has cabin pressure equivalent to the air at 6,000 feet in contrast to older aircraft with pressurization equivalent to 8,000 feet.

Passengers are not the only ones who benefit from these features. American Airlines can also use these features to compete with other airlines in the passenger experience arms race.

Lie-flat business class seats are fast becoming a necessity to effectively compete for the long-haul business class market. In many cases, these passengers are business travelers spending someone else's money and are therefore searching out the best air travel experience. In other cases, these seats are given as upgrades to high status travelers which, in turn, encourages these travelers to stick with American to continue taking advantage of the status earned at the airline. And with business class passengers generating a disproportionate share of airline revenue, it's clearly an important market to please.

Main Cabin in American Airlines' 787. Source: American Airlines.

In the main cabin, American has the potential to increase customer satisfaction rates encouraging repeat customers while incurring little extra cost of its own. And in the airline industry, customer loyalty is important. Airlines have wheeled out all sots of miles, rewards, status, and upgrade programs to try to encourage passengers to fly their airline again. On top of that, the satisfaction of a few customers can influence how larger organizations choose to book flights. By bringing in basic features such as power supplies and higher cabin pressure, American has a better chance of building this sort of loyalty among its passengers.

Manufacturing rivalry
Despite the plans to bring in the Boeing 787, American Airlines is still ground worth fighting for by both Boeing and Airbus. Unlike some airlines that focus on one manufacturer over the other, American has ordered large numbers of aircraft from both airplane makers. Its narrow-body order for over 400 aircraft includedvariantsof the Airbus A320 and Boeing 737.

American Airlines has also diversified in the wide-body area, where it has ordered 22 Airbus A350 aircraft to join its fleet alongside the Boeing 787. Clearly, orders from this airline are still up for grabs for whichever manufacturer can provide the best option.

Aerospace manufacturing investors should take this as a sign that neither manufacturer can afford to sit back and expect American to show a loyalty to one manufacturer over the other. As such, there will still be fierce competition for orders from this airline potentially giving American more power in price negotiations and the airline's ability to influence what versions of aircraft Boeing and Airbus develop.

Getting ready for takeoff
Right now, American Airlines is testing the first of its Boeing 787 Dreamliners in West Texas, giving pilots experience flying the aircraft outside of simulators. But soon the 787 will connect Dallas/Fort Worth International to Chicago, Beijing, and Buenos Aires.

With commitments for 42 aircraft and rights for another 58, the Boeing 787 is set to play a big role in American Airlines' strategy to reduce its exposure to volatile fuel prices and capture more passengers by offering a better experience. As new aircraft come into this airline's fleet, investors and passengers should be ready to see big changes at American Airlines.

The article This Boeing 787 is Just the Beginning for American Airlines originally appeared on Fool.com.

Alexander MacLennan owns shares of American Airlines Group. Alexander MacLennan has the following options: long January 2017 $25 calls on American Airlines Group and long January 2016 $60 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.