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Tuesday December 19, 3:24 pm Eastern Time

United to retire 727s early, buy Airbus planes

(UPDATE: adds analyst, company comments, updates share price)

CHICAGO, Dec 19 (Reuters) - United Airlines, the world's largest air carrier, said on Tuesday it will retire one-third of its Boeing 727-200 aircraft in 2001, a year earlier than expected, in an effort to counteract the effects of higher fuel and labor costs.

The UAL Corp. (NYSE:UAL - news) unit said retiring the 25 planes will result in slower than expected capacity growth of between 2.5 and 3 percent next year.

United said it plans to buy 13 Airbus 319/320 aircraft for delivery in fourth quarter 2002 to replace 727s scheduled for retirement.

The deal with Airbus Industrie [ARBU.UL] is valued at about $650 million based on list prices, but a big customer like United could see sharp discounts -- perhaps more than 20 percent, analysts said. United officials declined to comment on the value of the actual contract.

United's 727-200s seat about 147 passengers each in two classes and are used in domestic service into and out of the airline's hubs. A319s seat about 124 passengers and A320s seat about 150.

``As costs grow higher, that means they have to cut back on increased marginal flying,'' ING Barings analyst Ray Neidl said. ``With higher labor costs and a slowing economy, they have the incentive to speed up the retirement of older aircraft.''

Reduced capacity growth could aid United's earnings in a period of slowing traffic growth, lowering its relative costs. Analysts are predicting slowing traffic growth for 2001. However, analysts said they were already expecting capacity growth levels of 3 percent or less for 2001.

NEW AIRCRAFT MORE EFFICIENT

Salomon Smith Barney analyst Brian Harris said it makes sense for United to retire the 727s, which are relatively inefficient aircraft that require three pilots and have three engines. The Airbus aircraft use two pilots and have two engines.

United recently signed a new contract giving its pilots top pay in the industry.

The company is now in talks with its mechanics, and expected higher labor rates have cut deeply into its bottom line, causing it to post a loss for the third quarter. Analysts expect further losses in the fourth quarter and in first quarter 2001.

Sustained high fuel prices have also hurt airlines this year, although many analysts expect prices to fall with the advent of warmer weather in 2001.

Chicago-based United, which currently has 75 727-200s, said it expects to retire the rest of them by the end of 2003. The average 727-200 in the company's fleet is 21 years old.

The airline previously announced plans to retire its entire fleet of old Boeing Co. (NYSE:BA - news) 747-200s and DC-10s by February 2001. All the retired aircraft will likely be sold to other airlines around the world, United officials said.

UAL shares, which in the past year have ranged from $34-3/4 to $79, gained 1/2 to $36-3/16 in afternoon trading on the New York Stock Exchange.

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