Delta swaps Boeings for Airbus planes in $14bn order
American airline Delta is to replace
its old Boeing planes with 50 Airbus wide-body jets powered by Rolls Royce
engines.
The order, worth $14bn (£8.9bn), confirmed by Delta on Thursday, is a victory
for the European plane maker over its US rival's Dreamliner 787.It includes 25 Airbus A350-900 and 25 advanced Airbus A330-900neo aircraft.
Rolls Royce will provide Trent engines for both types of aircraft and long term servicing in a deal worth $5bn .
The order is welcome news to Rolls Royce which has seen
its share price fall by around a quarter since the beginning of the year
following cut backs in military spending.
The company issued a profit warning in October and earlier this month
announced 2,600 job losses as development work on two of its latest engines, the
Trent 1000 and XWB, came to an end. Airbus is reported to have won the contract after promising to deliver its latest A330neo in 2019, ahead of Boeing's 787 Dreamliner.
Boeing problems
The Dreamliner has been beset with problems, suffering several delays before its 2011 introduction and then being grounded due to battery fires last year.
However, by October this year Boeing said more than 1,000 Dreamliners had been ordered by 60 customers around the world.
The Delta deal is significant for Airbus and Rolls Royce because they hope other American legacy carriers will follow its example as they upgrade their ageing fuel-hungry fleets.
John Leahy, Airbus' Chief Operating Officer said: "When the most successful U.S. airline today ... says 'yes we want 50 more of your wide body planes', you can't debate the fact that it is a massive endorsement of your product line"
The A350s will be delivered in the second quarter of 2017 and will fly routes between the U.S. and Asia. They are expected to give a 20% improvement in operating cost per seat over Delta's existing aircraft.
The A330neos will fly medium-haul trans-Atlantic routes as well as some routes between the American west coast and Asia.
Boeing's 777 Problem: Delta and Everyone Else Want Newer
Planes
New airplane technology almost always trumps the old. The planes that are
built today burn less fuel and need less maintenance than their predecessors. If
you manufacture airplanes, however, this truism presents a tricky problem: How
do you keep selling an older model after you announce its successor (PDF) as the
latest and greatest thing to ever have reached the skies?
Boeing (BA) faces that issue with its 777, a jumbo jet that has become a
well-liked staple of global airline fleets over the past 15 years. The 777 sales
problem drew a fresh spotlight this week, when Delta Air Lines (DAL)announced an
order for 50 twin-aisle jets from Airbus (AIR:FP), split between the A350 and
A330neo models, to replace Delta's aged 747 and 767-300 fleets.
With a list price of $330 million, the 777-300ER accounts for virtually
all of the remaining 777 order book-making it a key component of Boeing's
profitability. "The good news is that the 777-300ER has had really strong
pricing, so that gives you some cushion" for discounting, says Teal Group
analyst Richard Aboulafia. "The bad news is: I have no idea where any demand
would come from."
The Delta deal is driven in no small part by the lower prices and faster
delivery speeds Airbus was able to offer the airline. But the older 777s Boeing
pitched for use at Delta's Seattle hub and on its trans-Atlantic routes were a
big factor, and Delta's decision underscores the market's lack of interest in a
plane that is awaiting replacement. "It's just reached the end of its life,"
says Scott Hamilton, editor of the aviation website Leeham News and Comment.
"Why would you buy an airplane that you might take delivery of in 2017 or 2018
or 2019 when you have the brand-new model coming in 2020?"
Boeing says it can bridge the production gap from the old 777 to the
777X, its next-generation replacement, by netting as few as 40 orders per year.
So far this year Boeing has taken 55 orders for the 777, including a deal
announced on Thursday to sell 10 to Kuwait Airways. The new order is worth $3.3
billion at list price, but Kuwait Airways probably negotiated a discount in
excess of 50 percent, given both Boeing's need to move 777s and the price breaks
manufacturers typically offer customers. In July, All Nippon Airways (9202:JP)
finalized an order for six of the older planes.
Boeing clearly believes it can meet its goal. "We expect demand for the 777
to remain healthy through the end of this decade," Boeing Chief Executive
Officer Jim McNerney said last month during an earnings call.
There are two likely ways Boeing could try to fill the interval until the
new aircraft arrives: turn out fewer than eight 777s each month and offer steep
discounts to buyers. The company vows to continue the current pace of making 100
777s per year, although many observers are skeptical. "There is nobody in the
marketplace that I have talked to who believes that posture and frankly, if you
talk privately to anybody inside Boeing," says Hamilton, "they don't believe it
either."
Discounting, on the other hand, is almost certainly on the table for the
777 sales team. The big question is whether Boeing will be able to cobble
together enough small orders, even with strategic price cuts, to keep the 777
viable for an additional five years.
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