United to review orders for 737s and Airbus A350 airliners

Bloomberg

United Continental is weighing whether to alter a $12.4 billion order for Airbus Group’s largest twin-engine jets and is studying a swap of Boeing’s smallest 737 for a longer version still on the drawing board.

The airline may convert some of the Airbus A350-1000s to smaller long-haul models, Chief Financial Officer Andrew Levy said at United’s Chicago headquarters. United also is considering the so-called Max 10X, a stretch of Boeing’s largest 737, to replace some of the single-aisle jet orders it recently deferred as part of a cost-savings push.

Chief Executive Officer Oscar Munoz hired Levy in August as part of a new management team charged with closing the company’s profit gap with Delta Air Lines and American Airlines. In mid-November United postponed 61 of Boeing’s smallest passenger jets, trimming spending by $1.6 billion over the next two years, as part of $4.8 billion in initiatives to cut costs and generate revenue.

“These fleet decision are big decisions, they affect your balance sheet for a long time,” Levy, 47, said. “These are big capital decisions that you have to live with for a really long time, so you need to make sure you get it right.”

United holds the second-largest order for the -1000, which has only garnered 195 total orders, according to Airbus’s website. Qatar Airways is the largest customer for the jet, which is similar in size to Boeing’s 777-300ER and took its maiden flight last week. An Airbus representative declined to comment.

Levy said United also is rethinking its share buybacks after announcing a $2 billion repurchase plan this summer that followed a $3 billion effort from a year earlier. The pace may need to slow because of significant increases in labor expenses from several new union contracts as well as rising fuel costs, he said.

United unveiled other efforts this month to reap greater revenue and savings from its worldwide route network. Improvements in the way the airline forecasts demand and manages seats is expected to generate an extra $900 million a year. Cost-cutting moves will save another $700 million by 2020, compared with last year’s level.

Munoz pledged to reshape the executive corps he inherited when he became CEO in September 2015 and has been under pressure from investors to improve performance. With new agreements with workers in hand, the focus now is to lift United’s operating profit, which amounted to 13.6 percent of sales last year. Industry leader Delta had a 19 percent margin and American’s was 15.1 percent.

Scrapping current jet orders altogether is unlikely because it would be too costly, Levy said. United plans to accept delivery of 14 of Boeing’s ultra-long 777-300ER, the first of which is due to arrive within weeks. That is a “done deal,” he said.

Boeing met with United officials recently to discuss the Max 10X, a longer version of the largest 737 model. It “definitely looks to be of interest to us,” Levy said.

United’s interest is critical as Boeing weighs how to respond to the Airbus A321neo, which has emerged as a hot-seller for airlines flying trans-continental routes.

Boeing is mulling two options. One is a simple stretch of the Max 9 that would enter the market by 2019 and rely on a higher-thrust version of the Leap-1B engine developed for the Max family. The Chicago-based planemaker is also studying a more extensive revamp that would rely on the larger Leap created for Airbus and would be ready to fly commercially by late 2021.

“We are continuing to work through the business case and talk to customers about a potential Max 10X,” Boeing spokesman Paul Lewis said. “Once this process is successfully completed we will be in a position to share more details.”

Deferring the 61 737-700s was an easy call, Levy said, because of the jet’s small size and older technology. United also is considering the more advanced 737 Max 8 or the Max 9 models as replacements, Levy said.

Levy likes Bombardier’s C Series jets but until a review of United’s entire fleet is completed he’s unsure “if there’s a place for a 100- to 120-seat airplane.”

United placed the A350-1000 order in 2013, and it has a value of $12.4 billion at list prices before big discounts that are customary for major airlines. Levy wants to look at whether United should swap out some or all of those aircraft for other wide-body jets, such as the A350-900, which can fly longer routes, or the smaller A330.

“Since we have the opportunity let’s look at what we think would be ideal,” he said.