American Airlines’ narrow body options

American Airlines, at the end of 2Q18, had 946 active mainline aircraft in its fleet. Of these, 776 (82%) were single-aisle aircraft. Looking at this fleet we note that the average is quite young at about 13 years. But it is also clear the fleet has certain areas that must be getting a lot of attention. American was one of the first US majors to go for a refleeting - and led to the development of the 737 MAX in a hurry after Airbus nearly won the entire order. We note this fleet, once the largest user of the McDonnell Douglas MD-80, has moved strongly to the 737. This fleet also includes the substantial Airbus fleet that came with the merger with America West/US Airways. American is retiring its last few MD-80s by next summer. That means 45 aircraft out of the fleet. Losing capacity isn't something that is easy to right now for the airline. The chart below illustrates just how full its typical flights are. As the airline loses that capacity it is adding as well. American's fleet is the largest A320 operator, is the second largest A319 operator after EasyJet and has the largest A321 fleet. So even as the airline keeps taking deliveries of MAX8s, it's not all Boeing. American has 85 MAX8s still to be delivered plus 100 A321s. Looking at the table above we can see that the 757 replacement at this stage is the A321. It is an open question if the MAX8 eventually replaces the A320s. The focus of this story though is the A319 fleet and soon to be retired MD-80s. These aircraft serve markets that may too small for the A320 or the 737-800/MAX8. The A319 and MD-80s as of 2Q18 represented 168 aircraft or 21.6% of the single-aisle fleet. Such a large segment, one might expect, must look for a like-sized replacement. This puts American squarely in a runoff between the A319neo, MAX7, A220-300 and the E195-E2. Based on the market reaction to the first two, we would think they have the lowest chance of selection. We say that despite the flight deck commonality and pilot pool arguments. Both those models are economically outclassed by the newer A220 and E2. That means we are down to a runoff like JetBlue faced. At JetBlue, the airline wanted to refresh its E190s and switched to the A220. This despite the fact it had a substantial outstanding E190 firm order pending and its pilots required minimal training to move to the E2. Embraer was highly confident in its chances for a win. But then, after the A220 became an Airbus product the formerly merely attractive CS300 became the winner because Airbus was able to offer a creative option with JetBlue's outstanding A320neo orders, upgrading many to the A321neo. It was a solution that Embraer could not match, no matter what. The JetBlue experience underscores why a deal between Boeing and Embraer is necessary for both these OEMs. Absent such a deal, the next big deal (which may be at United) gives Airbus an advantage that Boeing and Embraer, operating separately, cannot match. American plans to dispose of its E190 fleet. To make a comeback at American, Embraer has fine offerings in the E190-E2 and E195-E2. But it may need creativity from Boeing to assist with making a deal as attractive as Airbus will make. American provided us with their perspective. They pointed out they are still adding A319s via leases - which United is also doing. Cheap A319s are very attractive. Certainly more attractive than anything new, even with fuel prices double what they were a year ago. The following table is from American's 2Q18 8K and reflects their fleet plans. The key issue here is that there is no apparent pressure at American to refresh their single-aisle fleet as we thought. The above table shows the MAX8 fleet growing. The A321neo comes in 2019. The A320 fleet stays steady. The ten 757s that leave the fleet in 2019 are replaced by the first batch of A321neos. The loss of the MD-80s is covered by MAX8s. American countered our thinking about the 737 as being too large for certain markets, saying that indeed we will be seeing 737s serving markets where MD-80s have been flying. Their argument is that even though this is an upgauge in seat count, it is justified given high load factors. The airline claims little pressure to update its current single-aisle fleet.

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