U.S. taxpayers on hook for coming aircraft bubble burst

[usa1]

http://washingtonexa...article/2504067

You need to get ready for the next bubble to burst -- because you're going to pay for it.

The popping of the airplane bubble could be the next tremor to hit the U.S. economy, as economically unstable commercial airlines around the world buy up fleets of jets that they cannot afford.

Troubled domestic airlines are on buying sprees, too. Holman Jenkins, the Wall Street Journal columnist who began warning of an aircraft bubble in 2010, writes that American Airlines "placed a huge order for 460 new jets even as it was sailing toward its inevitable Chapter 11 filing."

 

[AA89]

Labor cuts will pay for everything. Another round of bankruptcy within the next 10 years will cover it. It's a proven formula, why change it?

Even Boeing and Airbus can file after the airlines stiff them. Their labor groups can cover their shortfalls.

What a system......

 

[WorldTraveler]

Even at the deepest discounts imaginable, AA's order book is probably close to $25M - a staggering amount of additional debt and far beyond the level of savings they can get compared to other airlines that have far smaller order books.

When you compound the effect that consolidation will have on Europe as well as how the growth of the well-funded Middle East carriers will impact traditional flag carriers, the world is likely looking at a major crash in aircraft values - and Airbus and Boeing won't foot the bill for the planes that are no longer needed.

 

[FWAAA]

When DL recently ordered 100 739s, DL said the following:

As a result of maintenance efficiencies and a 15 to 20 percent improvement in fuel consumption per seat, the Boeing 737-900ER will have lower unit costs than the older technology Boeing 757 and 767 and Airbus A320 aircraft that it will replace. The aircraft will be equipped with CFM56-7B engines produced by CFM International, a joint venture of General Electric Co. of the U.S. and Snecma of France.

"With significant savings from increased fuel efficiency and lower maintenance costs, these aircraft will be cash flow positive and earnings accretive from the first year of operation," Anderson said.

http://news.delta.com/index.php?s=43&item=1428

If new 739s are "cash flow positive" and "earnings accretive" from their first year of operation at Delta, I'm confident that the AA planes will also be cash flow positive and earnings accretive when they arrive as well.

New fuel efficient planes involve a gamble that fuel prices stay high or climb higher. DL chose to limit the size of its bet by ordering 100 instead of 500. AA's making a bigger gamble. If fuel prices are $4/gal or $5/gal by the end of the decade, AA's larger bet may pay off in a bigger way. OTOH, if fuel prices languish or fall to much lower levels, DL's smaller bet will make RA look very smart.

Airlines have a choice: Buy new fuel efficient planes or buy more fuel. AA has chosen the "buy planes" route.

 

[WorldTraveler]

You used that same argument before - and it still doesn't work.

There is no doubt that new aircraft save costs... maintenance and fuel.
But AA's order book is more than 3 times larger than what DL is spending on new and used aircraft as well as mods on its existing fleet. AMR would need to save not only the 3X more in fuel than DL but also the interest on the debt. Remember that the M90s have almost identical fuel burn as a 738 - but probably cost 1/4 of the cost.

It also doesn't change the fact that if DL can match fare levels to costs - and a less fuel-efficient fleet can still pay the bills, then it isn't necessary to buy new aircraft - and it also doesn't mean that the savings that AA might have over other aircraft will fall directly to the bottom line.

For a number of years, AA and DL have very comparable fuel efficiency numbers - and near the bottom for the US industry. But if you compare CO, which has had the youngest, most efficient fleet among network airlines, the difference in fuel efficiency is only about 15%.
For DL's fuel costs, a 15% reduction in fuel expense would amount to about $1.7B per year. But it would take more than $25B in expenditures to obtain that reduction - plus interest costs.

It isn't a given that fuel prices will continue to rise. The world has plenty of oil and more is being discovered. Further, there are power politics going on in the middle east that will ensure that some players will pump more than the market needs in order to maintain the status quo.

Even if you factor in maintenance savings, they only last for the first several years.

I'm not sure the justification is really there to replace the majority of the fleet over a 7-10 year period and in so doing end up with the most heavily leveraged balance sheet in US airline history. Debt is still debt and it will affect AA's ability to compete in the marketplace. You need only look at a few countries in Europe as examples of what happens when your debt levels are much higher than your peers.

No other airline has ever spent that much money relative to their size on aircraft and survived long-term.

 

[FWAAA]

You used that same argument before - and it still doesn't work.

There is no doubt that new aircraft save costs... maintenance and fuel.
But AA's order book is more than 3 times larger than what DL is spending on new and used aircraft as well as mods on its existing fleet. AMR would need to save not only the 3X more in fuel than DL but also the interest on the debt. Remember that the M90s have almost identical fuel burn as a 738 - but probably cost 1/4 of the cost.

What does the size of the order have to do with whether the planes are cash-flow positive and earnings accretive? AA has proposed buying just over 500 single-aisle Boeing and Airbus planes over 11 years to replace MD-80s, 757s and 762s (and probably some of the early 738s with the 737MAX order toward the end).

If 100 new Boeings pay for themselves at DL (according to RA, as I quoted above), then what makes AA's order of five times as many planes NOT cash flow positive and earnings accretive? DL's positive cash flow and earnings accretion predictions take into account the interest on the DL order, so what makes AA's order different? Whether AA had ordered 50 or 500, what matters is the fuel efficiency and maintenance costs of the planes they replace, not the size of the order.

The 100 738s that AA has bought over the past three years have replaced MD-80s and have paid for themselves just like DL's 739s will pay for themselves.

The remainder of your post does not address the primary question. Exactly what does the size of the oder have to do with anything if each plane is cash flow positive and earnings accretive (because it replaces an old, fuel inefficient and maintenance hog plane)? I'm not quoting Tom Horton, I'm quoting Richard Anderson.

You aren't implying that Anderson was lying, are you? He exposed himself to potential securities fraud violations (including prison time) by telling everyone that these 100 739s will pay for themselves. Given that, I take him at his word.

Whether DL can achieve the same goals at lower cost by gathering all the used MD-90s and 717s on the market has nothing to do with the positive economics of the new Boeings (and in AA's case, Airbus) ordered by both AA and DL. Essentially, your position boils down to "an order by DL for 100 new Boeings will be cash flow positive and earnings accretive, but not an order at AA for five times as many planes." Nowhere have you explained why that's the case.

 

[WorldTraveler]

You don't get the concept of debt - you never have - and that is the reason why there is a difference.

If other carriers achieve a level of costs that is within 15% of AA's and take on a whole let less debt to do so, then AA is at the disadvantage, not the other carriers.

You can't grasp the concept that CO's fuel costs are not 80% less than the size of DL or UA's despite having a much younger fleet w/ fuel efficiency comparable to AA's; their fuel costs are 15% less....

because DL and UA still have fuel efficient aircraft in their present fleet - or ones for which the cost of replacing them does not pay for the cost of buying.

IOW, the cost savings for 500 new airplanes is not 5X the cost savings of 100 airplanes - in part because other airlines don't find the justification to replace 2/3 of their fleet.


Remember that AA built its business plan on the assumption they would walk away from their pension obligations and now those will still be on their books.
Once again, AA will walk out of BK court w/ the largest debt commitments in the history of aviation, costs that may not be much lower than their peers (remember that AA's cost target in its labor related BK filings was costs just 1% lower than DL - and that was before DL announced its DCI/mainline fleet restructuring and the refinery deal).

But just let me know what airline has spent as much on fleet replacement as AA will be doing - over such a short period of time - and has survived.

 

[usa1]

US tax payers are suckers :blush: Guess what, somebody gets rich and when the buble burst you lose? More crony capitalism?

Airbus to double $12B for its U.S. suppliers


Wichita, Kan. - European aerospace giant Airbus said Monday it plans to double the $12 billion it now spends with U.S. suppliers amid strong airplane sales, explaining that the company has a backlog that is "disturbingly healthy."

http://www.theday.co...08079940/-1/BIZ