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American Airlines Details Its Cuts in Planned Spending

November 15, 1991

DALLAS (AP) _ American Airlines announced Thursday it has reached tentative agreements with two jet makers to slow down delivery of planes it has ordered between now and 1995.

American chairman Robert Crandall, in a private speech to analysts in New York Wednesday night, detailed the airline’s $8.2 billion cut to its five- year, capital spending plan that would have originally cost $22 billion.

Citing financial upheaval in the airline industry, Crandall said American would build its fleet of 602 jets to 682 by the end of 1995 instead of 775 as originally planned.

American will defer or cancel options to purchase 93 jets valued at $5.2 billion.

In addition, the airline has reached agreements with Boeing Co. and McDonnell Douglas Corp. to push back the delivery time for aircraft it has on firm order. The delay and other initiatives will trim capital spending by roughly $3 billion.

American, the nation’s largest airline, will continue to grow, but it has decided to cut the pace because of the industry’s deep troubles. Crandall had already said the spending plans would be cut by $5 billion, with more cuts to be announced, and Wednesday’s speech outlined those cuts.

″Should conditions change, we have the ability to restart our growth at whatever rate then seems appropriate,″ Crandall said.

Signaling an intention not to exercise its purchase options now gave American some leeway in negotiating to delay the delivery of the aircraft it has on firm order with the companies.

A typical jet takes 18 months to build. ″Because of that lead time, we have to look pretty far ahead of time to decide what most effective production rates are,″ said Randy Harrison, spokesman for Boeing.

Boeing announced Thursday it was scaling back production of its 737 model but increasing production for 757s. Harrison said the moves respond to market demand but not directly related to American, which has no orders for 737s. The airline maintains firm orders for 45 757s but will pass on its options for 33 more.

Other aircraft options that American will not take are for 37 Fokkers, 11 MD-11s and 12 767s, Crandall said.

Crandall said rising costs, lagging revenues and what he considers to be shortcomings in the government’s stance toward the industry are reasons for pessimism about a return to profitability in the industry.

″Although I am optimistic that over time, left to its own devices, the industry will make the needed course corrections, neither my colleagues nor I are willing to bet American’s balance sheet that it will do so soon,″ Crandall said.

The stock of the airline’s parent company, AMR Corp., closed up $1.625 at $62.50 Thursday.

″It’s a very prudent move given the current bleak industry environment,″ said Julius Maldutis of Salomon Brothers Inc.

American earned $70.3 million in the third quarter but had lost $115 million for the first nine months of the year due to recession and consumer fears of travel during the Persian Gulf war.

In more recent months, American’s financial performance has been smacked by fare discounting of airlines.

Last week, Crandall said American would not make a profit in the fourth quarter largely because of the need to compete with such pricing tactics, which he blamed on carriers operating under federal bankruptcy protection.

On Wednesday night, he said, ″The key to 1992′s profitability will be the extent to which the impact of the bankrupt and semi-bankrupt carriers can be moderated, and at this point, it’s hard to be optimistic.″

At virtually the same time, one of the airlines in Chapter 11, Phoenix- based America West, said it would trim prices deeper than a cut led by USAir that the major carriers had matched.

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