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American Exec: How the Deal Went Down

American Airlines story updated with aircraft delivery schedule.

DALLAS TheStreet) -- The biggest aircraft order in commercial aviation history started out as something smaller, said a top American Airlines (AMR) executive.

"We needed to replace 300 aircraft, and we wanted to do it fast," said Virasb Vahidi, the airline's chief commercial officer, who oversees fleet planning, in an interview. "Our wish had been to start replacing 45 to 50 aircraft a year."

By Wednesday, when the order was announced , it had grown to firm orders for 460 narrow-body aircraft, along with 465 options through 2025 that could conceivably take the order to 925 aircraft.

Numbering 460 planes, the order is the largest in history, American said. It was split between two manufacturers, Boeing (BA - Get Report), and Airbus, because "no single manufacturer could have accomplished this," Vahidi said. List price for the 460 planes is about $38 billion, but airlines almost never pay list price, given the intense competition between manufacturers. The actual price of such deals are rarely disclosed.

Internally, American executives knew they were making history with such a huge order. They repeatedly reminded themselves that "we are trying to replace a fleet the size of US Airways (LCC), Vahidi said. US Airways mainline has a fleet of 338 aircraft.

American has said for years that it must replace its aging fleet of 214 MD-80s as well as about 100 Boeing 757s that are used in domestic service. These older aircraft are not only fuel inefficient, but also require more maintenance. (About 25 additional 757s are used in international service.)

Initially, American was methodically replacing its MD-80s with Boeing 737-800s. It took delivery of 31 B737s in 2009 and of 45 more in 2010. Another 15 will arrive in 2011, with 28 more in 2012 and 11 in 2013, making a total of 130 aircraft over five years. But the carrier wanted to go faster and accomplish more.

The Deal Gets Rolling

As head of fleet planning, Vahidi routinely talks with Boeing executives a couple times a month. After talks about a bigger deal started with Boeing, American approached Airbus. Both manufacturers made initial proposals. President Tom Horton and CEO Gerard Arpey and Vahidi talked frequently about the deal.

"We looked at both offers," Vahidi said. "One thing that made us look at it a bit more aggressively was that Airbus came to the table in the last round with a big financing package, putting $5 billion to $6 billion in financing into this.

"So both were coming in with huge financing packages, without touching our balance sheet. We thought neither one of them can solve this alone, but two can help us pull it together, so let's make it a double deal."

The Breakdown

The deal includes an order for 100 Boeing 737s with current engines and 100 Boeing 737s with new engines. American also gets options for 40 with current engines and 60 with new engines.

For current Airbus A320 family aircraft, the order is for 130 planes and the option is for 85 planes. For the A320neo with new engines, the order is for 130 aircraft with options for 280 more.

A key aspect is the flexibility that American wrested from the two suppliers, both obviously eager to participate in the world's biggest aircraft order. In later years, American's options will include replacing more aircraft in its existing fleet, expanding its flying if its cost structure permits, replacing aircraft not yet delivered with newer aircraft, or replacing existing 737s.

Most importantly, Vahidi said, "we now have a line of sight in terms of lowering our operating costs" through the use of newer aircraft. Within five years, the average age of American aircraft will be nine years, while United (UAL - Get Report), and US Airways aircraft will average 13 years of age and Delta (DAL - Get Report) aircraft will average about 15 years.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

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