As we outlined a few weeks ago in "AMR's Big Order to Pressure Cash Flow, Boeing in Precarious Position," we indicated the increasing likelihood that AMR (which holds American Airlines) may split a massive $15 billion-plus order between Boeing (BA) and Airbus to replace its aging fleet of narrowbodies. This would represent a huge shift at the major carrier, as AMR currently flies all-Boeing aircraft. Verbatim from our July 1 report:
Boeing is in a rather precarious position. Airbus has claimed all along that it will capture customers currently flying the 737 with its A320neo (new engine option), an upgrade to its A320 that has the option to sport more fuel-efficient engines. The Paris Air Show confirmed our analysis that the A320neo was the best plane for the 150-200 seat segment, and we would not be surprised to see AMR opting for the Airbus re-engined aircraft. As many airline executives have indicated, they want replacement planes sooner than later and may not have the patience for Boeing to build a brand new narrowbody by 2019-2020 ...
... However, we don't think that AMR may be the only all-Boeing carrier to switch to another commercial aircraft maker - read our case as to why Ryanair (RYAAY) and Southwest (LUV) may switch here ("A Serious Blow to Boeing is Looming"). And despite the huge number of orders Airbus raked in during the Paris Air Show for its A320neo, Boeing continues to be content with inaction at this time - it still hasn't decided what to do next with its 737 (a re-engining by 2016 or a brand new build by 2019-2020). We suspect that AMR is asking Boeing to re-engine the 737 and threatening to make the transition to Airbus if the domestic jet maker does not cave in.
Yesterday, Bloomberg reported that AMR may actually go through with splitting an order for as many as 280 replacement narrowbodies between Boeing and Airbus, the latter offering a compelling financing package to the struggling, debt-heavy network carrier. We continue to believe that AMR will likely move to split this order if Boeing does not offer a re-engined version of its workhorse 737 by 2016. We think airline customers do not have the patience to wait for a brand new narrowbody from Boeing, especially after the serial delays of the firm's 787 Dreamliner.
Further, if AMR decides to split the order, we would not be surprised to see other all-Boeing narrowbody carriers diversify away from the domestic jet maker when the time comes to upgrade their respective fleets. We believe the cost advantages of the re-engined A320neo may outweigh the commonality benefits (pilot training, maintenance costs, etc.) of retaining an all-Boeing fleet, particularly if carriers are forced to wait almost a decade for an all-new replacement narrowbody plane from Boeing (these carriers would lose potentially billions in fuel costs over this timeframe).
In all, we believe that Boeing may have upside during the coming boom in aircraft deliveries expected in the next few years, though we think there are better opportunities in the aerospace supply chain, which we outline in our Best Ideas Newsletter. We maintain our bearish stance on airline stocks and think investors can gain the best exposure to declining airline equities via put options on the Guggenheim Airline ETF (FAA).