AMR Bankruptcy Clouds Boeing Jet Order

November 30, 2011

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Boeing could be at a disadvantage to Airbus because the bankruptcy of AMR, the parent of American Airlines, places up to USD$40 billion of jet orders at the mercy of a US bankruptcy court, lawyers and bankruptcy experts said.

It faces a lengthy wait for confirmation of a key order for 100 737s, hampering efforts to level the playing field with rival Airbus after a patchy 2011.

The plane makers are refreshing their short-haul models with new engines in response to requests for fuel savings from airlines.

The Airbus A320neo is about a year ahead of the Boeing 737 MAX. Airbus has won firm or provisional orders for 1,450 neos, more than twice the 700 provisional agreements for the 737 MAX.

Blaming high costs, AMR took cover from creditors just four months after ordering 460 Airbus and Boeing jets.

Airbus won the majority of the sale and pushed its rival to change strategy by successfully wooing American, a long-time Boeing customer.

Boeing salvaged part of the deal by agreeing to match the Airbus "re-engining" strategy, rather than investing more time and money in a bolder redesign to try to leapfrog its rival.

But the change came too late to allow designers to finish plans and prices for the 737 MAX, forcing Boeing to settle for a draft deal which it has yet to translate into a binding order.

Under the US system, a bankruptcy court can reaffirm or reject contracts that involve spending a troubled company's money during the 18-month breathing space offered by Chapter 11 reorganisation.

But it is generally harder to persuade a court to authorise significant new obligations ahead of a full reorganisation plan, although exceptions can be made to preserve the core business.

"The court would be extremely reluctant to approve entering into a new agreement at a time when the shape and direction of the reorganisation plan is uncertain," said Stephen Selbst, a partner at New York law firm Herrick, Feinstein.

BOEING CONFIDENT

Most industry analysts believe both sets of orders will go ahead barring a fresh economic upset. That is because American desperately needs new aircraft to reduce its fuel costs. It is expected to retire older planes as part of its reorganisation.

But the Boeing order remains on ice during a slippery time for the global economy, meaning a further delay is not entirely without risk. Boeing had also hoped to add momentum to its wider sales campaign by tying up the prestigious order.

Delays may also give time for lessors to reflect on their involvement in the deal, which depends heavily on financing, as fast-growing emerging-market carriers fight over the same jets.

"My guess is that today Boeing wish they had a firm order," said an independent industry executive, asking not to be named.

Boeing insisted it was confident the deal would go ahead.

"When we entered into our recent agreements with American, we were confident that these assets at issue will be core to their operation in almost any scenario," said Boeing spokesman John Kvasnosky. "We have no reason to doubt that today."

Nor is it automatically the case that the purchases of Airbus jets will get approval. Courts must be satisfied that other creditors will not be disadvantaged and bear in mind that damages must be paid if the contract ends up being halted later.

But the Boeing case is unusual because of the scale of the unresolved part of the order, worth USD$9 billion at list prices.

"It throws a spanner in the works for sure," said Dana Lockhart, a former finance director for Airbus Americas. "Taking on a post-petition obligation of that magnitude (during bankruptcy protection) is dead on arrival."

Lockhart has sat on a number of airline bankruptcy creditor committees, including the stormy Eastern Airlines bankruptcy case in 1989, the last panel to include both Airbus and Boeing.

The American Airlines' deal in July intensified a race for more efficient aircraft that has pushed Airbus and Boeing production to record levels despite warnings of a new recession.

It included a provisional order for 100 revamped 737 MAX worth $9 billion at today's list prices. American also ordered 100 current-model 737s worth USD$8.5 billion. The Seattle Times reported these would be worth USD$4.7 billion after discounts.

Airbus's share of the deal included a firm order for 130 revamped A320neos worth USD$9 billion at list prices and 100 current model A320s for which it plans to arrange leases.

In practice, airlines in court restructuring are usually allowed to proceed with firm orders to modernise their fleets, and cancellations have been limited to a handful of cases. But aviation industry sources say some deliveries may be deferred.

"The American orders are so central to the business plan that neither manufacturers nor the airlines would want to see them blown up," Lockhart said. "The best thing to do is to agree mutually to kick the can down the road."

(Reuters)