Tuesday, October 31, 2017

United Is Near a Deal to Acquire Used Airbus Jetliners

United Continental Holdings Inc. wants to acquire as many as 40 used Airbus jets, seeking a thrifty way to bolster short-distance service as the airline struggles to get costs under control.

The carrier is looking at A319 and A320 single-aisle aircraft, the Chicago chapter of the United pilots union said in an Oct. 10 memo to its members. A deal for 30 to 40 of the jets is “imminent,” according to the memo. The ultimate agreement could be for fewer.

Planes operated by U.K. budget carrier EasyJet are a possible source of the aircraft, people familiar with the matter said. Most of the planes would be A319s, said one of the people, who asked not to be named because the information is confidential. EasyJet, which declined to comment, has its own plans to take over leases on A320s from Air Berlin Plc, which is being liquidated.

he search for used planes underscores United’s efforts to reduce expenses as it seeks to regain investor confidence in its turnaround plan. Shareholders punished the Chicago-based carrier earlier this month after an earnings call in which management failed to establish how it would contend with rising costs and improve profit margins to the level of industry leader Delta Air Lines.

United executives are pursuing “a plane they already have in their fleet,” said George Ferguson, an analyst at Bloomberg Intelligence. “They can add them cheaply and there is no additional cost for spare parts or to train pilots and mechanics.”

It isn’t clear how United would configure the used planes or where they would fly. The carrier’s existing A319s seat 128 passengers and its A320s carry 150. They are used primarily on domestic routes.

The current market value for 30 decade-old A319s is about $480 million, while 30 A320s of the same vintage is roughly $690 million, according to consulting firm Avitas. Either would be a substantial discount to the total list price of $2.7 billion to $3 billion, even after taking customary discounts into account. The pilots memo didn’t mention whether the planes would be purchased or leased. Delivery could be over several years.

Discounter Playbook

United Chief Financial Officer Andrew Levy, a former operating chief at discount airline Allegiant, has been a zealous advocate for tapping the used-jet market, saying over the summer that the practice would be “an important part of our fleet strategy.” United has acquired used planes before, agreeing to add second-hand aircraft from China in late 2015.

The planes could give United a relatively inexpensive way to increase service in the busy summer period or other peak times while keeping capital expenses under control, said aviation consultant Bob Mann.

“Andrew Levy is a former Allegiant Air guy, and Allegiant lives on used airplanes,” Mann said. “It’s a rational thought process. It hasn’t been used that much by the major carriers.”

Read more: Airlines are hungry for hand-me-down jets

United declined to comment on specific plane-acquisition plans. “We have made clear that we are going to explore the used market to acquire additional aircraft as part of our overall fleet strategy,” the company said by email.

Peak Periods

United probably sees the aircraft as a way to provide additional seats during busy periods, such as the summer and holidays, Mann said. During most of the year the planes would be in light duty, flying about four hours a day or getting used as spares. They would be pressed into service for as much as 12 hours a day during periods of high demand.

“It’s a cheap way of bringing in peak capacity,” Mann said.

U.S. airlines, the world’s most profitable, have been among the largest consumers of used narrow-body jets made economical as low fuel prices damp the need for cost-savings from more-efficient new aircraft.

This is a “great market for jet sellers” as demand remains strong for used single-aisle planes despite a recent spate of airline failures, said Gary Liebowitz, an analyst at Wells Fargo & Co. “With interest rates low and financing widely available, midlife narrow-body values appear to have increased lately,” Liebowitz said in an Oct. 30 report.

United has pinched pennies on its fleet in other ways, as well. In September, the carrier delayed the first deliveries of new twin-aisle Airbus A350 jets until 2022 instead of 2018. Last November, it deferred delivery on 61 Boeing Co. 737 and upgraded the order to a more fuel-efficient version of the workhorse narrow-body jet. The company said it expected to save $1.6 billion in capital expenses from the move.

(Michael Sasso, Julie Johnsson, and Benjamin D Katz - Bloomberg News)

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