AMR Gives Boeing a B for Effort

Pity Boeing (NYSE: BA  ) . It fought as hard as it could, bargained as low as it dared, and even agreed to re-engine its vaunted 737 single-aisle airline for AMR (NYSE: AMR  ) . And it still failed to book a clear win.

This morning, AMR confirmed the rumors that have been floating around all week: That in the contest to pick a plane maker to rebuild its airfleet, it will split its orders between Boeing and Airbus. For Airbus, it's a big win, adding to the momentum the European plane maker has been building all year long. AMR gave Airbus the lion's share of its business -- 260 A320s, while agreeing to take just 200 of Boeing's 737s. In future years, Airbus's margin of victory will only expand, as AMR took out options on an additional 365 planes from Airbus …

A slap in the face
… and just 100 planes from Boeing. Put it all together, and Airbus is getting perhaps 625 planes' worth of business from AMR. That's a 2-to-1 victory over Boeing's potential sales of 300 planes. It's certainly a disappointment to Boeing, inasmuch as it had for 15 years maintained an exclusive relationship with AMR -- a relationship that's now been casually tossed aside. It's certainly a victory for Airbus, which has now broken Boeing's stranglehold on business from this major airline.

Winners and losers
For Boeing, the damage is even worse than the headlines make it look. In order to win even a piece of AMR's order, the company had to agree to "re-engine" its 737, tacking on a new engine from General Electric (NYSE: GE  ) joint venture CFM International. The new engine is said to be more fuel efficient than the old, which should help AMR with its fuel costs. But integrating it into the 737 will mean more development costs for Boeing, and that can only hurt profit margins.

Airbus, for its part, probably sacrificed profit margins as well in its efforts to underbid Boeing. So long as Airbus avoided actually selling the planes at a loss, though, its two-times-bigger contract win should help Airbus make it up on volume.

The biggest winner here, though, has to be GE. Thanks to AMR's hard-dealing, and Boeing's cave on the re-engine question, GE has won new business building engines for Boeing's 737. United Technologies (NYSE: UTX  ) lost out on this deal, and GE already leads in engine orders for the A320neo. I've said it before and I'll say it again: GE remains the biggest winner of all.

Fool contributor Rich Smith holds no position in any company mentioned. Click here to see his holdings and a short bio. 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.


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  • Report this Comment On July 20, 2011, at 4:30 PM, coffeeblack wrote:

    Buying entire new fleets!?! American is in the midst of a meltdown. Morale is so bad that the only question is, will they have three consecutive strikes, or three concurrent strikes. Leave it to AMR to buy fleets and remodel terminals rather than end the war between the employees and management.

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