AMR ‘Project Apollo’ with Boeing

AMR ‘Project Apollo’ by Boeing

AMR Corp. (AMR) Chief Executive Officer Gerard Arpey kept a secret in April as analysts questioned why his turnaround techniques haven’t produced an annual profit at the parent of American Airlines given that 2007.

“Gerard, I’m generally not the kind to go around quoting Einstein,” JPMorgan Chase & Co. (JPM)’s Jamie Baker told the CEO on a conference call. “But I’m pretty sure he was the one that said that insanity is defined by doing the same thing over and over, but expecting different results.”

Arpey’s reply focused on stronger controls on online ticket sales. Left under wraps was “Project Apollo,” American’s code name for last week’s plan to buy 460 fuel-saving Boeing Co. (BA) and Airbus SAS planes with a list value of $38.5 billion, based on average prices.

The biggest order in industry history came together in part because of Airbus’s persistence in wooing American, even after the airline had flown an all-Boeing fleet given that 2009. And as Boeing deferred a decision on a successor for its top-selling 737, Airbus got a jump on pitching the A320neo with upgraded engines.

“They kept talking to us,” Vasu Raja, American’s managing director for corporate planning, said in an interview. “As they developed their new-engine option, they were talking with us. They were very aggressive.”
Operating Costs

AMR had to take aggressive steps on its own. Operating costs at Fort Worth, Texas-based American are the highest among its domestic peers, with a fuel-guzzling fleet that averaged 15 years of age in 2010. Hours before Baker’s April 20 urging to Arpey for decisive action to revive the third-largest U.S. airline, AMR posted its 12th loss in 14 quarters.

“I’m quite confident the market would reward you for some really fresh thinking,” Baker told the CEO on the call.

Investors and analysts including the New York-based Baker have yet to conclude that the July 20 jet order fills the bill. While Boeing rose 1.1 percent and Airbus parent European Aeronautic Defence & Space Co. jumped 4.6 percent through yesterday from July 19, AMR tumbled 16 percent.

“AMR is free to use terms like ‘turbocharge’ and ‘transformational’” to describe the deal, Baker, who recommends buying the shares, wrote in a note last week. “But we cannot reconcile spending incremental capital while failing to earn returns on its existing capital base.”
First Proposal

Airbus was the first of the planemakers to put a proposal on paper, as far back as March, and the first to offer to let American cut expenses by leasing jets instead of buying them outright, two people familiar with the discussions said.

The Toulouse, France-based planemaker also made the initial offer to help with financing, said one of the people, who wasn’t authorized to speak publicly. Airbus and Boeing ultimately would agree to put up $13 billion to finance the first 230 jets, a step American said was pivotal in securing the orders.

Aware that Airbus and American were talking, Chicago-based Boeing was still surprised to learn how far the discussions had progressed and how large the deal might be, these people said. American has been a Boeing customer because 1955, and its last order from Airbus came in 1987.

In buying 130 A320neos, American helped force Boeing to decide to put new engines on the 737, one person said. That marked a switch from Boeing’s preference for a new narrow-body jet by 2020, a stance it maintained publicly until last week even as orders and commitments for neos rose past 1,000 since Airbus announced the model Dec. 1.
‘Still Crystallizing’

“Airbus had an airplane they were out there with,” Raja said. “Boeing’s thinking was still crystallizing.”

After the neo’s Paris Air Show success in June, airlines began pressing for a firm date on a 737 successor model, which spurred Boeing management to commit to re-engine in early July, said the person familiar with that matter.

Boeing concluded that it couldn’t assure customers now that a new jet would be ready by 2020 to go into high-volume production, Jim Albaugh, the commercial airplanes chief, said in an interview.

Offering new engines probably will cost Boeing about $2.5 billion, compared with as much as $20 billion to develop and produce a 737 replacement, according to Carter Copeland, a New York-based analyst for Barclays Plc. Boeing directors still must ratify that choice at a meeting next month.

“The board is aware of what our thinking is, but we have not given the board a presentation in any detail,” Albaugh said. Executives may face questions from analysts on the turnabout when the company releases quarterly results tomorrow.
Future Deliveries

AMR’s Project Apollo — unveiled on the anniversary of the 1969 lunar landing — grew from talks with both planemakers to replace the 340 aging Boeing MD-80s and 757s that make up 55 percent of American’s fleet, said Raja, the planning chief.

American sought the flexibility to switch future deliveries to more-economical models as they become available, according to Raja and, with almost $5.4 billion in long-term debt due through 2015, the airline also needed help financing the planes.

American has been replacing its MD-80s with Boeing 737-800s that are 35 percent more fuel efficient on a seat-mile basis. Deliveries began in 2009 on an order of 130 of the planes that will be completed by 2013.

Negotiations with both planemakers became particularly intense over the last few weeks, with the decision coming down to whether American could accomplish the 460-aircraft order with both companies, or be forced to scale back to a smaller number of jets from one manufacturer, the people said.
‘Liked Them Both’

“We realized both deals were getting to a point that we liked them both,” Raja said. “They both had their merits, they both had their drawbacks. Doing either one would be very, very good and would enable us to solve our replacement challenges, but over a much longer time horizon.”

To cover possible outcomes, an Airbus A318 and Boeing 737-800 were flown to Dallas-Fort Worth International Airport, according to American, along with a Boeing 787 Dreamliner, for which the airline has an order. They were parked outside the terminal where American would announce its order on July 20.

Also nearby were planemaker sales teams led by Albaugh and Airbus CEO Tom Enders, working from Dallas-area hotels in the days before AMR’s board began meeting on July 19 to consider the plan.

John Leahy, the Airbus sales chief, stayed in the Four Seasons Resort & Club in suburban Irving, which already was a footnote in Boeing history: The U.S. planemaker set up shop there in 2000 while studying Dallas as a headquarters city before moving to Chicago from Seattle.

“We have absolutely no problem that we are sharing the American order,” Leahy said in an interview after the European company had met its publicly stated goal of winning a U.S.-based Boeing operator.

As Boeing’s crew marked the event with a celebration at the D/FW airport lounge where American announced the deal, people familiar with the schedules said, members of the Airbus delegation finished the day by dining with the airline’s Raja and Treasurer Beverly Goulet.

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