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American's Gearing Up for the Turnaround

Despite the weak economy, AMR unit American Airlines rolled out two new Boeing 737-800s, its first new planes in three years and its first new narrow bodies in nearly eight years.
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Airline passenger traffic has slowed, forcing




cut production

, but the world's second-largest airline is looking past all that.



unit American Airlines on Monday rolled out two new Boeing 737-800s, its first new planes in three years and its first new narrow bodies in nearly eight years, at ceremonies in Chicago and Tulsa, Okla. The planes will begin flying on Tuesday. American is scheduled to take 29 aircraft this year, followed by 39 in 2010 and eight in 2011.

"It is certainly a show of faith in our future as an airline," said Chuck Schubert, American managing director of corporate planning, in an interview. "I'm not a prognosticator on the economy, but we certainly recognize the economy will turn around at some point and we want to be positioned to meet that demand with a competitive product when it does.

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"We are fortunate in that, for the vast majority of the 76 deliveries we plan, we lined up financing last year before things really started getting messy in the capital markets," he added.

The timing of announcement is good for Boeing, which last week cut its first-quarter earnings projections and said it will reduce monthly production of the 777 next year and delay previously announced plans to boost output of the 747 and 767.

"By any measure, this is a big deal," says Randy Tinseth, Boeing vice president of marketing, in an interview. "We build about thirty-one 737s a month, and they're in the process of taking 76 airplanes over the next seven quarters."

Counting the 737s, as well as McDonnell-Douglas airplanes, American will have taken delivery of nearly 1,000 Boeing aircraft in its history, making it one of the planemaker's top customers, Tinseth says. While the current environment is difficult for Boeing and its customers, he says, U.S. carriers "over the last six to 12 months have done a very good job managing their business, reducing capacity in light of the passenger decline

and in the case of American and



, replacing older less fuel efficient aircraft with more efficient aircraft."

Nevertheless, Boeing will likely cut 737 production, said Macquarie Research analyst Rob Stallard in a report issued Monday. The 777 reduction is "just the first of the cuts that Boeing will have to make to its aircraft production rates as it moves through this down cycle," Stallard wrote. "Next up is the 737, which has shorter lead times, where we are forecasting a reduction from 31 a month in 2009 to 25 a month in 2010." Tinseth declined to comment on whether 737 production may decline.

For American, the order begins the process of replacing the fleet of 279 McDonnell-Douglas Super 80 aircraft, which average 19 years in age. The new airplanes have 160 seats, compared with 144 in the MD-80s, and are about 35% more efficient on a seat-mile basis. American already flies 77 Boeing 737-800s.

For passengers, the new aircraft mean cabin improvements, including drop-down LCD video entertainment monitors, larger overhead bins and better seats in both first class and coach. "Instead of the standard recline, the seat has a bit of a cradling motion, which is more comfortable," Schubert says. The seats also have more power ports for computers.

In October, American announced what could become the biggest

aircraft order in its history

, saying it wanted 42 Boeing 787s with options for 58 more. That order is contingent on American and its pilots negotiating a pay rate for the aircraft. Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research, click here now!