Like the Japanese sport of sumo wresting, the art of placing an aircraft order is about two things — timing and bulk.
United Airlines may have perfected both aspects. From the Wall Street Journal:
United Airlines has asked Boeing Co. and Airbus to propose dueling bids for up to 150 new airliners — the latest example of major companies exploiting the recession to bargain-hunt.
For the two aircraft makers, the deal could be worth more than $10 billion at a time when both are watching other customers cancel or defer orders. By staging a winner-take-all competition, United’s parent, UAL Corp., is hoping to obtain better terms than otherwise might be available, according to people familiar with the situation. . . .
This is a very smart move by United. It allows them to replace their ageing fleet on the cheap — pitting the two commercial planemakers against each other for a single large order at a time when they are both suffering from a lack of demand for aircraft.
It is also a similar strategy to what Ryanair did in the post-9/11 aerospace downturn when it placed a massive order for Boeing planes. The inexpensive aircraft purchase helped the Irish carrier keep its operating costs low, allowing it to compete on a fare basis for European passengers.
Such aerospace deals are crucial for an industry with crippling capital costs.
On a related note, it’s interesting to see AIG talk of breaking up its ILFC plane-leasing business. From the FT:
AIG, the stricken insurer controlled by the US government, is considering whether to break up International Lease Finance Corp if it cannot reach a deal to sell the entire aircraft leasing business.
AIG remains in talks with three private equity groups bidding for ILFC, a profitable company in spite of its parent’s collapse and a big customer to both Boeing and Airbus. However, progress has slowed in recent weeks as the would-be buyers seek a more generous financing package from the New York Federal Reserve, which along with the US Treasury owns 80 per cent of AIG, people familiar with the matter said.
The break-up of ILFC, one of the most powerful forces in aviation for decades, would scatter its fleet of more than 1,000 aircraft and leave the world’s airlines with one less depend-able source of leased planes
It would also leave the remaining ILFC units in a much more vulnerable position when it comes to placing aircraft orders.
Much of the plane-lessor’s bargaining power with aircraft manufacturers, up until now, has been down to the sheer scale of its business and the size of the orders it has been able to place. That stature means it can negotiate the best deals — like the Wal-Mart of the aerospace world.
Breaking the unit up would surely negate some of that force. It would also leave General Electric’s GECAS unit as the undisputed heavyweight among aircraft leasing companies.
Related links:
Airline cycles, redux – FT Alphaville
Aerospace mothballs - FT Alphaville
ILFC: The ‘F’ stands for… – FT Alphaville
Ryanair dangles order for 400 jets - FT
Ryanair will buy more planes should air travel slump – Bloomberg