MIAMI — On September 16, 2013 Airbus returned to American Airlines. The first day of operations for the airline’s first four delivered Airbus A319s was low key to say the least. This is in contrast to a little more than two years ago when, on July 20th, 2011, American Airlines announced an order for 460 new narrow-body jets (plus 465 options). The order made history in several ways: First, it was the world’s biggest aircraft order by frames and by value (at more than $38 billion list price). It was also American’s first order for a new build Airbus aircraft in more than 20 years, and it increased Airbus’ market share for narrowbody orders in the United States by more than 15 percentage points. To put some perspective on the occasion, I thought I’d take you behind the scenes of the momentous deal. I spoke with Airbus Americas’ Sales Director, Herb Franck who shared some more about the order, its significance, and all that went into making it happen.
An Important Deal for Airbus in the US
By the time American placed its order in July 2011, Airbus was no stranger to the US market. From the first four A300s it placed with Eastern Air Lines way back in 1977, Airbus had steadily grown its presence in the US market. By 2011, of the thirteen largest airlines in the United States only four (American, AirTran, Southwest, and Alaska) didn’t have Airbus product in their respective fleets. Of those four, American was the largest player. Franck says:
Through assimilation and merger, we ended up having all the other legacy airlines with Airbus products; i.e. Delta had none but Northwest did, and when they merged obviously they became an Airbus operator. So American was the only one left on the table, not ignoring the likes of Southwest and Alaska. Yeah we had some A300s with them from a deal made about 20 years prior. But at an airline of that size we were sort of left out, and we very much wanted to be part of American Airlines again. So it was very important for us to try and get into American Airlines ultimately.
And the deal has certainly allowed Airbus to consolidate its success in the US. In the time since, Airbus has sold hundreds of neos in the US, including A321neos to Hawaiian, building on its success with the A330 and A350 there. It also sold its first new-build A320 family aircraft (30 A321ceos) to Delta, who had been an exclusively Boeing customer prior to the merger. Even Southwest (plus AirTran) and Alaska, who eventually went all-MAX for their mainline narrowbody replacements, admitted that they gave Airbus a serious look before choosing the MAX.
Frosty Relations and A300 Support
Ironically, given the landmark nature of the deal and its historic nature, the deal began with a very unstable base. Franck had mentioned the A300 fleet, the last new Airbus aircraft ordered by American. In November 2001, an American A300, operating as Flight 587, crashed after takeoff at New York’s JFK Airport. American blamed Airbus in part for that crash and sued them for damages. The resulting conflict strained the relationship between American and Airbus. So Airbus had to start small. Says Franck:
It wasn’t like we went to this meeting American for the first time. But we worked on this for a good five years. I would say the relationship initially was tepid. There was such a small Airbus fleet here [at American]. Of course American had the 20 year agreement with Boeing that they had signed. They were basically committed to Boeing. So what we tried to do is keep the operational airplanes here [at American]; the current fleet up to the level and standards that we wanted them. And we put more of our emphasis on really supporting the A300 fleet, even though it was a really small fleet, than we did on trying to sell them new products. We kept them informed on what we had and what was coming up, but our focus was really on the customer support side so to speak.
Even though the legally binding portion of American’s exclusivity agreement with Boeing had evaporated in the wake of Boeing’s 1997 merger with McDonnell-Douglas (as an antitrust condition), American had abided by the so-called Gentleman’s Agreement that remained in place for nearly fourteen years. So when American retired its final A300s in 2009 after 31 years in service, it appeared that the door had been shut on Airbus at American.
Thawing the Frost
Of course like any good competitor, Airbus hadn’t stopped pitching its aircraft to American despite the sales pleas falling on (largely) deaf ears. Franck says,
This was a rather unique deal. It was not like other deals I had been involved in. Over the previous five to six years, we made several attempts to make a sale at American. It wasn’t like we sat on our hands for five years and never talked about buying airplanes. And we suggested and offered to them that, “Look, you could turn around your MD-80 fleet in half the time if you used two OEMS (original equipment manufacturers).” Because they just couldn’t take all those airplanes on at Boeing at one time, nor quite frankly could Boeing support financially that many airplanes going to one operator in a short period of time. So we suggested that they [American] let us replace part of their MD-80 fleet. It’s always a positive having two fleets. And when for the new widebody they selected the 787, we were actively pitching our A330 at that time as an alternative to that. So there were a lot of what I call trial proposals and things like that going on.
Of course none of those proposals were successful, at least not yet. But they, along with the support work on the A300, did achieve something important for Airbus; they re-created a relationship with American where there had been none before. Franck relates:
But then what happened on the timeframe is that the management of American got to know us. They really didn’t buy anything, they got to know us and got to understand how we do business and they respected and trusted what we had put forward and the things we had done in the past. This gave us credibility.
The NEO Injects New Vigor into the Race
Once Airbus, and Airbus Americas’ Sales Director, Herb Franck, had restored the relationship, it could really begin selling American on an order. But it needed a new product to really get the ball rolling: Enter the A320neo.
Says Franck: So what really kicked this thing loose was in December of 201. We as a company announced the plane that we called the neo, ‘which is new engine option.’ And this really sparked American’s interest. They were known to retain their older aircraft for as long as functionally possible, only buying new aircraft when the types had been in the market for quite a few years, so they had a stronger position from which to negotiate. But this also meant their ‘new’ fleets were not on the leading edge of technology. And they wanted to change that trend. So when they announced the neo, they said, ‘You know, we’d really like to try the new airplane. Boeing has nothing to offer – they’re talking about something in 2025. We can’t wait.’
But American needed planes faster than even the neo offered. It had around 65 737-800s on order at the time, but that wouldn’t have been enough to replace the entire MD-80 fleet, let alone the 757s (with a size differential there as well). Moreover, Boeing was dealing with record backlogs for its 737NG program at the time, which is why it wasn’t launching a re-engine at the time. So Boeing absolutely couldn’t get enough replacement airplanes to American in the timeframe required. So Airbus pitched American the current engine options (CEOS) as well:
So we started talking about the neo and they said: ‘Well that’s great but again it’s five, six years before we can start doing this [taking neos]. We need to roll over the MD-80 fleet now, and we’d like to start replacing our 757 fleet. So, I said: ‘Why don’t you consider taking some of the early airplanes, ceos as we call them? Operate those for seven-ten years, and then start replacing them with the neo.’
This appealed more to American, but they were afraid of getting stuck with a bunch of airplanes that had tanked in value after the introduction of the neo. Keep in mind that at the time, American still had Fokker F100s on lease ten years after the type was retired. The carrier was losing over $1 billion per year on the depreciation of its aging fleet, much of it tied to the MD-80s. Franck says that one way Airbus worked around that was to offer help in arranging short leases for the initial aircraft:
And that idea got traction, but the problem with that was that there was some concern that the ceos would lose a lot of their value in that short time because there would be a new product coming out. And of course they didn’t want to be stuck with something on their books that didn’t have a lot of value. So the suggestion was made, why not lease them? And that’s in fact how the deal came about. Where the first group of airplanes are the ceos, they’re all leased in airplanes, they happen to have 10 year leases. And at the end of that term, they will be spun out and replaced by the neos. So what really brought this forward is two things. One was our announcement of the neo, and secondly our ability to craft something around a deal that worked for them on the ceo.
Code Name Apollo 11
Airbus had sold American on the deal, and what remained in the summer of 2011 was mostly minutiae – negotiating the vagaries of the purchase agreement for things like maintenance, parts, support, liability, and the like. Franck explains:
Once we actually got to that point they signed an LoI [letter of intent], quite frankly the time we spent in Dallas was a lot of negotiating back and forth on the terms and items of the PA [purchase agreement]. We were basically 100% focused on cleaning up that PA. And cleaning up all the dialogue. Because when we made the announcement, we wanted to have a PA. So quite frankly, even though there were a lot of hours invested while we were here in Dallas during the summer heat, the hours were really spent churning through a huge purchase agreement document and polishing it off where all parts of the house, including the legal side of things, were happy with it.
Franck also shared a fitting anecdote summing up the deal:
When we started this project, the contracts and planning guy over at American said, ‘you know we want to keep this to a small group within the company, we want to give it a code name, because it just makes it easier. So we ended up calling it Apollo 11 as a code name. Ironically enough, after almost 7 months, we ended up signing the PA on July 20th, the day that was the 42nd anniversary of Apollo 11 landing on the moon – just by accident.
And Apollo 11 is certainly a fitting metaphor for the deal, even if it arose by accident (some would say fate). The order certainly was a momentous occasion in Airbus’ history despite the order being split with Boeing. And by some metrics Airbus “won” the competition with Boeing for American’s business, even though the order was split. Keep in mind that Airbus got 260 orders versus 200 for Boeing, and a similar proportion of the total purchase options. More importantly, it forced Boeing’s hand on the 737 MAX when Boeing was really looking to ride the 737NG into a new product the following decade. And Airbus has parlayed the American order into better re-engined business across the board. The A320neo leads the 737 MAX in firm purchase commitments (firm orders plus memorandums of understanding [MoU]) by a “score” of 2,455 to 1,602. It has also won orders from 6 carriers who were previously non-Airbus customers (Transaero, Pegasus, Norwegian, American, Arkia Israel, and Lion Air), as well as major orders from Garuda Indonesia, Qantas, and SAS, all of whom were majority 737 operators on the narrowbody side. Meanwhile Boeing has only managed to convert Singapore
Airlines subsidiary SilkAir from Airbus narrowbodies to the neo. The American order sparked a larger trend which has benefited Airbus immensely. And moving forward, split fleets are likely the way to go. Once you get up above 50 frames in a narrowbody fleet, the benefits of commonality are largely outweighed by those of having the right aircraft for the right mission, especially fuel burn wise.
Adding 767 Replacement and Optimism for the Future
Interestingly, the initial plan was not for American to replace the 767-200ER transcon fleet with A321s; that was something that came about later down the line. Franck says:
That was really something that happened after [the order]. Our primary focus was pitching the A321 as a 757 replacement and the A319 as a MD-80 replacement. And as we got into the product and we started looking at the capabilities and range, and they started looking at their fleet. And they had the oddball group of 767s that they ran domestically, there were only 14 or 15 of them at the time. And we looked at it and starting saying, ‘Here’s this idea, we did some layouts and so on.’ They started looking at routes and frequency from that, and that’s what sprung the idea of using a more economic airplane where they could still give the same level of service. And that’s how American decided on replacing the 767 with the A321.
He also shared that American plans to have no more than sixteen or seventeen A321s eventually configured in the Premium trans-con configuration. And he is bullish about new business for Airbus with the new American, especially if the merger with US Airways is allowed to proceed, pointing out that US Airways management will form the majority of the merged carrier’s management. Franck had this to say on the subject:
Certainly they are good friends of Airbus. They have A330s in the fleet and they have A350s on order and they are of course excited for that product. So I would expect that as the big fleet of 777s at the new American starts to age, that there’s a good opportunity for us to see a lot of new widebody and A350 activity at the airline.
And that’s the story (abridged) of one of the most important aircraft orders in the history of commercial aviation. And when American’s A319s entered service, it may be one small step for the airline and the US industry, but it was one giant leap for Airbus in the United States of America.