American Airlines (NASDAQ: AAL) is one of Airbus' (NASDAQOTH: EADSY) top customers. However, its commitment to one of Airbus' key models seems to be wavering.
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Less than a year ago, American Airlines deferred its order for 22 A350 widebodies. The largest U.S. airline had originally planned to take delivery of 14 A350s in the 2017-2018 period. This deferral pushed back its first two deliveries to late 2018, with the rest scheduled to arrive between 2019 and 2022.
American Airlines has deferred its Airbus A350 orders again. Image source: Airbus.
Late last month, American Airlines announced that it had deferred its entire A350 order by another two years. While the company still claims that it will eventually add the A350 to its fleet, it's not clear that it will ever make sense for American to go through with the order.
Reducing capital expenditures
For the past few years, American Airlines has spent heavily to modernize its fleet. But in the past year or so, as its profitability has come under pressure, the company has started to focus more on keeping capex in check. (American has also needed to reduce its international growth in light of challenging market conditions.)
Holding down capex will be particularly important in the next few years, as American Airlines has scheduled debt maturities totaling $12 billion between 2018 and 2021.
According to American Airlines CFO Derek Kerr, last year's A350 deferral reduced the company's capex by roughly $500 million in 2017 and $700 million in 2018. The more recent deferral will save another $500 million in 2018 and $300 million each in 2019 and 2020.
Does American Airlines need more widebodies?
Even after the most recent deferral, it's not clear that American Airlines will need the A350s when they are scheduled to arrive. Thanks to its recent fleet modernization program, the carrier doesn't have many planes left that need to be retired in the near term.
American Airlines has a relatively young aircraft fleet today. Image source: American Airlines.
The Airbus A350 could be a good replacement for American's fleet of 47 Boeing (NYSE: BA) 777-200ERs. However, those planes are just 16 years old, on average. Furthermore, the Boeing 777 is an exceptionally reliable model, and American is in the midst of refurbishing this fleet to add seats to each plane (and thus reduce unit costs). All in all, these planes probably still have a decade of life left.
Alternatively, American Airlines may plan to use its A350s for growth rather than replacement. But future long-haul growth is contingent on a better supply-demand balance in international markets. If international routes remain flooded with excess capacity a couple of years from now, American might just kick the can further down the road by deferring the A350s again.
The A350-900 has a lot of overlap with Boeing's widebodies
Another issue that American Airlines must consider is the overlap between the A350 and its Boeing 777 and Boeing 787 fleets. While American has deferred its A350 deliveries twice in the past year, it has kept its order for Boeing's 787 Dreamliner more or less intact. By early 2019, it will have 42 Dreamliners in its fleet.
Given that American Airlines operates lots of 777s and 787s, it doesn't necessarily need to fly the A350 as well. The 777s and 787s are suited to the same types of long-haul markets as the A350.
By contrast, most of American's international flights are about 3,500-4,500 miles in length, such as flights from Miami to South America or from the Northeast to Europe. American Airlines might be better off converting its A350 order to the cheaper A330neo, which has plenty of range and competitive unit costs for routes of this length. This would further reduce its future capex commitments.
Airbus can afford the loss
It wouldn't necessarily be bad for Airbus if American Airlines chooses to convert its A350 order to the A330neo. The A350 has a long backlog, with more than 700 unfilled orders. And while Airbus only received three A350 orders during the first quarter, it recently bagged an order for 20 A350-900s from China Southern Airlines, indicating that demand remains healthy.
By contrast, Airbus has just over 200 A330neo orders, and many of those are scheduled for far in the future. In short, Airbus has much more of a need to sell A330neos than A350s. As a result, both sides could benefit from making a deal to swap American's endlessly deferred A350 orders for A330neos.
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