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Boeing Reels in a Huge Order From American Airlines Group, Inc.

By Adam Levine-Weinberg – Apr 10, 2018 at 8:40AM

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Boeing got a huge win last week, as American Airlines placed a larger-than-expected order for 47 Dreamliners: 22 787-8s and 25 787-9s.

Chalk up another big win for Boeing's (BA -5.37%) 787 Dreamliner.

Last month, word leaked out that American Airlines (AAL -3.93%) had broken off negotiations with Airbus (EADSY -2.07%) about converting its A350 order to the smaller, cheaper A330neo. This was a strong indication that the carrier was nearing a deal to expand its Dreamliner fleet instead.

Sure enough, on Friday, Boeing and American Airlines announced an order for 47 Dreamliners, consisting of 22 787-8s and 25 787-9s. This will more than double the size of American's 787 fleet -- and it continues a recent surge of order activity for Boeing's Dreamliner.

A rendering of a 787-8 and a 787-9 flying side-by-side in American Airlines liveries

American Airlines ordered another 47 Boeing 787 Dreamliners last week. Image source: Boeing.

American Airlines outlines its new plans

US Airways -- which merged with American Airlines back in 2013 -- ordered 22 Airbus A350s more than a decade ago. However, American Airlines has deferred these A350 deliveries twice in the past two years, casting doubt on whether it really wanted to add this aircraft type to its fleet. More recently, management has indicated that it wants to simplify the fleet to improve the carrier's efficiency.

This gave Boeing a big advantage vis-a-vis Airbus, because American Airlines already operates the 787-8 and the 787-9. By contrast, it doesn't have any A330neos or A350s today.

Last week's aircraft order adds on to the 20 787-8s and 15 787-9s already in American's fleet, as well as the seven additional 787-9s it has on order for 2018 and 2019. Deliveries of the 22 787-8s are set to begin in 2020. These aircraft will be used to replace American Airlines' 24 767s, which are nearing retirement age.

Meanwhile, the 25 787-9s are scheduled to arrive beginning in 2023. They will replace some of American's older 777-200ERs, as well as its nine A330-300s, according to the carrier. This seems to imply that American Airlines has decided to hold on to its A330-300s longer than it had previously planned. As of a few months ago, they were all scheduled to exit the fleet in 2020.

All of the aircraft ordered last week will be delivered by 2026. Looking further ahead, American Airlines has options to acquire as many as 28 additional 787s between 2026 and 2028.

This move will probably save money

In conjunction with the expanded Dreamliner purchase, American Airlines is canceling its A350 order for good. As a result, it will record a special charge related to writing off purchase deposits that it will forfeit to Airbus.

An Airbus A350 in flight, with a cloud in the background

American Airlines has canceled its order for 22 A350-900s. Image source: Airbus.

Nevertheless, switching from the A350-900 to a mix of 787-8s and 787-9s should significantly reduce the company's aircraft acquisition costs. US Airways was a small, struggling carrier when it placed the initial A350 order, so it probably didn't get especially good pricing.

By contrast, American Airlines is the largest airline in the world. Furthermore, the 787 order it just placed was substantially larger than the 25-30 airplane deal industry observers had expected. The carrier likely used its purchasing power to get a very good deal from Boeing, which has been chasing Dreamliner sales aggressively this year by offering low prices.

Boeing adds to its 787 Dreamliner backlog

Boeing brought in 94 net orders for its 787 aircraft family last year, easily its best result since 2013. However, Boeing needs to average closer to 150 orders annually for its plan to build 14 787s per month to be sustainable for more than a handful of years.

While Boeing didn't report any Dreamliner order activity in January or February, it has been on a tear since the beginning of March. It has announced a conditional order for 10 787-9s from Hawaiian Holdings, a firm order for 25 787-9s from Turkish Airlines, and now the firm order for 47 787s from American Airlines.

Additionally, Emirates signed a commitment for 40 787-10s last November. There is some risk to that order, with U.S. airlines pushing the Trump administration to crack down on the growth of Emirates and its two largest rivals in the Middle East. However, if Emirates does firm up its 787 commitment this year, it would boost the type's 2018 order total to an impressive 122 aircraft.

Boeing has had to offer lower prices to win some of these recent deals. Yet the longer it can sustain 787 output at a rate of 14 per month, the lower its production costs will go. This makes its discounting strategy a smart move that will improve its long-term competitiveness in the widebody market.

Adam Levine-Weinberg owns shares of Hawaiian Holdings. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
$131.26 (-5.37%) $-7.45
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$12.21 (-3.93%) $0.50
Airbus Stock Quote
$22.24 (-2.07%) $0.47

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