United Splits Major Order for 787s, A350s

 - December 8, 2009, 8:12 AM

Following what UAL Corp. chairman, president and CEO Glenn Tilton characterized as a rigorous six-month RFP process, United Airlines this morning announced that it has placed firm orders for 25 Boeing 787-8s and 25 Airbus A350-900s, scheduled for delivery between 2016 and 2019. The contract includes so-called purchase rights for 50 more of each aircraft.

The announcement marked the first new order United has placed in more than a decade, said Tilton. “This is a significant investment in the future of our company,” said Tilton. “When we launched the RFP one of our financial objectives was to ensure any aircraft order not impact the work we are doing to improve our liquidity and strengthen our balance sheet over the long term. The deal needed to drive strong economics to justify the investments as well as provide the fleet flexibility the company requires. This order very clearly meets those criteria.”

According to United CFO Kathryn Mikells, cash payments from the airline amount to only $60 million over the next three years and $152 million over the next five years. “This gives us time to continue to strengthen our liquidity position and balance sheet prior to payment obligations wrapping up as the aircraft are delivered,” she said. Mikells added that United has secured “significant” deferral flexibility and broad substitution rights “that will allow [United] to manage [its] capacity effectively throughout the replacement cycle.” It also secured “significant” backstop financing from both Boeing and Airbus, she said.

United has timed delivery of the airplanes to coincide with the retirement of its international Boeing 747s and 767s. The company said the 50 new aircraft would reduce the average seat count of the airplanes they replace by about 19 percent, and by about 10 percent over the entire international fleet. Although United hasn’t yet chosen between the Roll-Royce Trent 1000 or GE GenEx turbofans for the 787, it estimates that the combination of the 787 and A350 will cut its fuel costs and carbon emissions by about 33 percent. It also said it expects to realize a 40-percent reduction in seat-mile maintenance costs compared with the airplanes they replace.

Mikells explained the reasoning behind splitting the order between Boeing and Airbus. “It was an economically driven decision,” she said. “As we looked at the different potential aircraft and looked at the economics…what became really clear to us is in weighing on the one side additional cost savings we could achieve by further simplifying our fleet against the economic benefit of having the right aircraft in the right range for the diverse kind of markets that we have internationally, the economics were really very straightforward and clear.”

According to United, the A350-900 will offer 11-percent more range than its current Boeing 747s, while the 787-8 promises 32-percent more range than its current 767s. “Selecting the next-generation aircraft from both manufacturers gives us the right range to optimally serve the markets in our diverse global network, a benefit that clearly overwhelmed the benefit of choosing a single manufacturer,” added United president John Tague. “The increased range of these aircraft will allow us to take full advantage of our strategically located network of domestic hubs, allowing new nonstop service from our hubs to destinations throughout Africa, Asia-Pacific, the Middle East and Europe, while improving the international route economics in the current United network.”