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AMR makes Boeing, Airbus share huge plane order

By Marice Richter

DALLAS (Reuters) - American Airlines split a giant order for 460 single-aisle jets worth up to $40 billion between Boeing Co and its European rival Airbus

The record-large order placed by the AMR Corp unit gives Airbus a stronger foothold in U.S. markets. The deal also rapidly refreshes American Airlines' aging fleet with more fuel-efficient planes to better compete with U.S. rivals.

For Boeing, the order is a bittersweet victory, marking the end of an exclusivity deal with American Airlines. The U.S. plane maker sealed its portion of the order by offering to put a new engine in its best-selling 737, retreating from a more ambitious plan to completely redesign the plane.

"My initial reaction is, 'Wow, what a big deal!'" said Alex Hamilton, managing director of EarlyBirdCapital. "I think that speaks to the underlying robustness of the cycle, if you will, just because it's the largest order in aircraft history."

"I think it's a marginal victory for Boeing," he said. "From a marketing standpoint it's a big deal for Airbus."

The deal, which calls for American to buy 200 Boeing 737s and 260 Airbus A320s, comes after tense haggling as American Airlines played the world's two largest plane makers off against each other to win concessions from each. Including purchase options, the deal potentially could total more than 900 planes.

As part of the deal, American Airlines also intends to order 100 of Boeing's new version of the 737NG, featuring CFM International's Leap-X engine. CFM International is a joint venture between General Electric and Safran .

The carrier is willing to be the launch customer for the upgraded 737, which needs approval by Boeing's directors.

AMR Chief Executive Gerard Arpey said the enormous order, unveiled on Wednesday, bolsters the airline's position in a very challenging industry that is a linchpin of the world economy.

"Without sugarcoating the fact that we will always have and face tough challenges in the near term, we believe that aviation's importance as a global economic and cultural catalyst will only grow in the years to come," Arpey said at a press event at the Dallas/Fort Worth International Airport.

AMR shares were flat at $4.93 on Wednesday afternoon, while Boeing shares were up 2.5 percent at $72.26. Shares of Airbus parent EADS gained 3.6 percent to 24.79 euros in Paris.

BATTLE FOR THE US MARKET

Negotiations between Airbus and American began in March and culminated in a tentative deal in recent weeks that was similar in size to Airbus' share of the final deal, its largest-ever by volume, a senior source involved in the talks said.

Word of this sent shockwaves through the Boeing camp, which rolled the dice on re-engining a few days ago and raced to pull together finance support as the clock ticked toward a board meeting ahead of AMR's earnings report on Wednesday.

"Boeing were caught off-guard. They had to scramble to re-engine," the senior source in the negotiations said.

American Airlines, which has not ordered Airbus planes since the late 1980s, said however, that the deal evolved over time as leaders recognized that no single manufacturer could provide the number and variety of planes to meet their needs.

Boeing and Airbus compete for dominance in the narrowbody airplane market whose value is estimated at $2 trillion over the next 20 years. Last year, Airbus said it would beef up its A320 with a new, more fuel-efficient engine. The plane known as the A320neo is scheduled to enter service in late 2015.

For more than a year, Boeing has debated whether to re-engine or redesign its competing 737. A redesigned plane could have been brought to market around 2020, but would provide greater fuel efficiency.

Delays in the Boeing decision left an opening for Airbus to win massive orders for its neo from customers who did not want to wait for Boeing to decide. Airbus dominated the Paris Air Show last month with orders for the A320neo.

To secure a chunk of the AMR order, and perhaps other upcoming U.S. airline orders, Boeing offered to re-engine.

Jim Albaugh, CEO of Boeing Commercial Airplanes, shrugged off suggestions of disappointment when prodded by reporters about the shared deal, saying he anticipates a lot more customers for the 737s with new engines.

"Once we have approval from the board, we think we will have other people pounding on our door for the re-engined aircraft," Albaugh told reporters in Dallas.

Boeing still could build an all-new 737. A spokesman said studies will continue on the new small plane.

"We have always been convinced that if Boeing looked at the challenges of starting an all-new single-aisle aircraft right now they would in the end turn to the re-engining option," Airbus Chief Executive Tom Enders told Reuters.

He said Airbus was looking seriously at raising its A320 production plans from a targeted 42 a month to meet demand but had not yet committed to do so.

"INSTANTANEOUS FINANCIAL BENEFITS"

American Airlines, formerly the largest U.S. airline, is now the third-largest U.S. carrier after United Continental Holdings and Delta Air Lines . It is struggling to bolster its position and believes new planes will help.

"There's instantaneous financial benefits," said Vasu Raja, managing director in charge of AMR's fleet planning, noting savings on fuel costs by flying more modern aircraft.

He said 50 percent of the deal is financed through operating leases. American won about $13 billion in financing provided by the manufacturers through lease transactions.

"It will help them in terms of fuel, obviously," said Steve Wilder, analyst at Capstone Investments. "These are newer planes and cleaner-running planes. But my guess is the lease expense is going to offset that.

AMR on Wednesday reported a net loss of $286 million, or 85 cents per share, for the second quarter, compared with a year-ago loss of $11 million, or 3 cents per share. The results were weaker than Wall Street forecasts for a loss of 81 cents per share, according to Thomson Reuters I/B/E/S.

(Reporting by Kyle Peterson, Tim Hepher, Roy Strom, Karen Jacobs, Blaise Robinson and Cyril Altmeyer, editing by Matthew Lewis)

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