In early September, United Continental (NYSE:UAL) announced a long-anticipated change to its Airbus (NASDAQOTH:EADSY) A350 order book. United deferred its A350 orders by several years and switched to the base A350-900 model from the larger A350-1000 variant. However, it increased the total size of its order from 35 units to 45 units.
This news was upstaged by a massive cut to United's earnings guidance contained in the same investor presentation. However, it has big implications for Airbus and Boeing (NYSE:BA). Let's look at what United's updated plans mean for the two aerospace giants.
United's Boeing 747 replacement plans shift
United Airlines first decided to order the A350 way back in 2009. Early the following year, it placed a firm order for 25 A350-900s, with deliveries scheduled to run from 2016 to 2019. These planes were meant to be an eventual replacement for the largest aircraft type in United's fleet: the Boeing 747.
In June 2013, United Continental deferred its A350 deliveries by about two years. It also converted the order to the larger A350-1000 model and ordered another 10 units, bringing the total to 35 A350-1000s. This change made sense, insofar as the A350-1000 is closer in size to the Boeing 747 than the A350-900.
However, in 2015, United Continental began to order the Boeing 777-300ER, which is similar to the A350-1000 in capacity. It now has 18 total orders for the 777-300ER, most of which have already been delivered.
Initially, United had planned to use the 777-300ER to replace smaller widebodies on popular routes, particularly from capacity-constrained Newark International Airport. More recently, it changed that mission, after recognizing that many international routes are already suffering from overcapacity. Instead, the 777-300ER has been serving as a direct replacement for United's aging 747s -- the last of which will be retired later this year.
A new role for the A350 at United
For the past year, new United Continental CFO Andrew Levy has been hinting that the company might want to dump its A350-1000 orders in favor of buying a smaller plane. That's exactly what it just did by converting back to the A350-900 model that United had ordered originally.
United now has a different role in mind for the A350: replacing its fleet of 55 Boeing 777-200ERs, most of which were built between 1997 and 2002. The A350-900 is very similar in size to the 777-200ER and has even more range. To facilitate this new mission, United has deferred its first A350 delivery all the way to 2022.
What it means for Airbus
An outright cancellation of United's A350 order clearly would have been bad news for Airbus. By contrast, the deferral is not a big problem, as Airbus is already nearly sold out for the A350 over the next several years. Indeed, the 35 deferred aircraft and the order for 10 more will help Airbus build up its A350 backlog for the mid-2020s. Most importantly, it means Airbus has beaten Boeing in the competition to replace United's 777-200ERs.
On the other hand, United's order change is another blow to the A350-1000, which hasn't been selling well. The backlog for Airbus's largest A350 variant will fall from 212 units to 177. This situation makes it even less likely that Airbus will ever be able to challenge Boeing's 777-9 with an even larger A350 model.
There's also another missed opportunity here for Airbus to build up a backlog for its A330neo model. In theory, the A330neo represents an attractive value proposition, providing most of the fuel-efficiency benefits of a state-of-the-art widebody at a much lower cost. Yet Airbus has only 210 firm orders for the A330neo, with less than a year remaining before the first delivery. Furthermore, Delta Air Lines is still the only premier airline that has ordered the A330neo.
What it means for Boeing
United's latest A350 order modification is a blow to Boeing, which had seemed to be in a good position to meet the carrier's 777-200ER replacement needs with its 787-9 and 787-10 models. United could still opt to buy more 787s for future growth or to replace a small proportion of its older 777s, but Airbus is getting the bulk of the 777 replacement business.
That said, United Continental has already helped Boeing out by ordering 18 777-300ERs when demand for that model had cratered.
Furthermore, United's decision to stick with the A350 rather than buying some A330neos means it still needs a replacement for its Boeing 767s, as well as its transatlantic Boeing 757s. This is exactly the market segment that Boeing hopes to target with an all-new "middle of the market" jet. Thus, while Airbus has won an important deal, Boeing still has a big sales opportunity ahead at United Airlines.