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United moves slowly for 50 new Boeing jetliners

Dec. 9, 2009 – United Airlines is ordering 50 new airplanes the way some people ease into a cold lake. Toes first, and very slowly.

The deal announced Tuesday has several conservative pieces. United split its order between the Boeing 787 and the Airbus A350, and waited until the depth of a recession so it could press for better prices. No planes will be delivered until 2016, and United has extensive rights to defer the orders. Perhaps most importantly, United only has to come up with US$152 million over the next five years, putting off the day it will need to line up loans for its new planes.

At list prices the new jets would be worth more than $10 billion, with about $4 billion for Boeing's 787-8 and around $6 billion for the Airbus planes. United President John Tague said the carrier got a discount, which is common for jet orders, though he didn't specify how much.

"We felt that we had a significant opportunity by timing the order with the backdrop of the current economic environment,'' he said.

The planes will replace Boeing 747 and 767s. Deliveries are expected between 2016 and 2019.

Both of the new aircraft models are made with composites, meant to be lighter (and thus more fuel-efficient) than the usual aluminum construction. Neither plane has ever flown. Boeing hopes its 787 will make its first flight by the end of this year, while Airbus is aiming to deliver its first A350 in 2013.

Both of the planes have two aisles and would usually be used on international flights. The 787-8 seats up to 250 people, while the Airbus A350 seats 314. Both can fly more than 14,500 kilometres, enough to go non-stop from United's hub in Chicago to Shanghai.

"They give us access to virtually every region in the world from all of our hubs,'' Tague said.

United could have picked the much larger A380 or 747-8. Although it might be able to fill those massive planes during boom times, United would risk having many empty seats in a recession. Tague said the company would rather reduce its risk in future tough times, rather than "capture every last dollar of opportunity that an extremely large aircraft might create for a short period of time."

So why split the order? Both planes are made of lightweight materials, but their sizes are different and United thinks having some of each will let it match the size of the plane to demand on individual routes. That flexibility outweighed the benefits of
sticking with one plane or the other, the company said.

United said it has signed letters of intent for both planes. John Leahy, Airbus chief operating officer, said Airbus expects a firm order in a month or two. He said it wasn't surprising that United split the order, and noted that it was the first time United has ordered non-Boeing wide-body jets.

Boeing president and chief financial officer James Bell told analysts on Tuesday that Boeing was pleased United bought the 787. As for splitting the order, "I guess it's better to get some than none,'' he said.

United has not yet worked out financing for the planes, although it said the manufacturers agreed to provide loans if needed. United has been squeezed for cash during the recession, as business travel, which it depends on more than other airlines _ has dropped off. In October it raised about $424 million in a stock and notes offering, and it has been mortgaging other assets such as spare parts.

Fitch Ratings analyst Bill Warlick, who tracks United's debt, said United is caught between needing to pay down debt versus replacing a fleet of big planes that will include some nearly 30 years old by the time the new deliveries come.

Paying off debt is nice, "but at some point you simply have to replace those aging widebody aircraft," he said.

"I think it makes good sense. I think they approached this competition very methodically and at an appropriate time,'' he said.

United, the third-biggest airline in the U.S., said this summer it was seeking competing proposals from Boeing and Airbus to replace the biggest jets that make up nearly half of its fleet.

United made its last jet order in 1998, and hasn't taken a delivery since 2002. It has been aggressively shrinking in recent years. The new jet order won't change that, because the new planes have fewer seats than the ones they're replacing. United said the new jets will average 19 per cent fewer seats than the planes they replace. Overall its international fleet will have about 10 per cent fewer seats once the new planes are flying, United said.

United said the new planes will be about 40 per cent cheaper to operate over their lifetime for each seat mile flown.

The orders come with future rights for 50 more of each aircraft.