11 August 2010

How American Airlines Saved the MD-80

When McDonnell Douglas launched the MD-80 the first aircraft were rolling of the Long Beach line in the midst of the financial turmoil in the airline industry right around the time of deregulation. This led to disappointing initial sales for the aircraft, with only 62 aircraft delivered in the first two years of production and none of them from one of the US majors. The board of directors then authorized the price of the aircraft to dropped to the breakeven point just to move planes and if that wasn't enough, there was quite a bit talk about closing the MD-80 production line. Airlines simply didn't have the capital to spend on new planes during the years following deregulation.

In 1984 Robert Crandall was the then-new head of American Airlines and found the airline saddled with increasing inefficient gas-guzzling 727-100s and 727-200s. At one point he even considered getting them re-engined to improve their fuel economy- but those plans were shelved when McDonnell Douglas came to him with a ground-breaking plan that would allow Crandall to replace the 727s while at the same time keep the MD-80 production line open. McDonnell Douglas salespeople pitched a 20% improvement in operating economics over the 727, but Crandall wanted more than just better economics.

McDonnell Douglas was desperate for a major order- by this point the industry was rife with rumors of the cancellation of the MD-80 program and with the rocky financial picture of the company at the time, those sort of rumors began a vicious cycle as major airlines began to shun the MD-80 series and give McDonnell Douglas salespeople the runaround in corporate headquarters worldwide.

McDonnell Douglas then did something that would change the way the industry purchased and operated aircraft- they offered American 20 MD-82s on a five-year lease with options for extension. With as little as 30 days notice, American could return the aircraft at a cost of less than $2 million per jet. In return, no money would be required up front. McDonnell Douglas hoped that American's operation of the MD-82s would lead to firm sales later on. With the lease payments arranged coming out to less than the interest on a new aircraft, American agreed to the lease terms which included a share of the profits for the manufacturer if the aircraft proved highly productive for American Airlines.

Under this arrangement, those first 20 MD-82s led to an American order worth $1.35 billion for an additional 60 MD-82s with options for another 100 MD-82s for a total potential sale of over $3 billion. Production rates in Long Beach were increased from an abysmal low of three jets per month. American's first MD-82s entered service in May 1983 and proved to be more efficient than advertised- 37% better than the 727s they were replacing. American would eventually become the world's largest MD-80 operator, with over 300 aircraft (prior to the TWA acquisition).

This ground-breaking agreement changed the way the industry re-equipped and allowed cash-poor carriers to to ditch their older gas-guzzling jets. TWA followed American with an initial 15 aircraft lease similar to what McDonnell Douglas had set up with American and by the mid-1980s, the MD-80 was on the order books for other airlines as well such as Alitalia and Finnair, ensuring the long-term future of the MD-80 series. Had American not come through with its orders, the MD-80 production line likely would have been shut down (possibly for good) at the end of 1982 with an order backlog of only 7 jets. There would eventually be 1,125 MD-80 series jetliners built, 710 of which are still flying today. From the MD-80 family came the MD-90 (117 built, 105 still flying) and the 717 (which was designated the MD-95 prior to the Boeing-McDonnell Douglas merger; 156 built, 144 still flying). Quite a turnaround for a program that was on the verge of shutdown had it not been for American Airlines!

Source: Douglas Twinjets: DC-9, MD-80, MD-90 and 717 (Crowood Aviation Series) by Thomas Beecher. Crowood Press, 2002.

1 comment:

  1. All three of the articles I have read on this site so far are very interesting.