More than three years ago, Spirit Airlines (NYSE:SAVE) began planning for its next major aircraft order. Notably, the company -- which for many years has only operated Airbus (OTC:EADSY) A320-family aircraft -- strongly considered adding a smaller aircraft type to its fleet: either the Airbus A220, formerly known as the Bombardier CSeries, or the Embraer E2-series jets. It even evaluated adding the Boeing 737 MAX to its fleet mix.
In the end, all of the drama was for nothing. Last week, Spirit Airlines and Airbus announced that the carrier had signed a memorandum of understanding to buy 100 A320neo family jets, maintaining its strategy of operating a single fleet type.
Spirit Airlines needed to make a decision
Currently, Spirit Airlines' order book only runs through 2021. It calls for the carrier to end that year with 193 planes in its fleet: 31 A319s, 64 A320s, 68 A320neos, and 30 A321s.
This is significant because Airbus ended last month with more than 5,700 firm orders for A320-family jets in its backlog. It is building fewer than 700 per year and has limited flexibility to increase production in the near future. As a result, Airbus is mostly sold out of delivery slots until 2024. Meanwhile, to maintain its planned double-digit capacity growth rate, Spirit Airlines will need dozens of aircraft deliveries each year.
Airbus does reserve some delivery slots for important customers, and it's generally possible to line up aircraft from leasing companies with only a year or two of notice. Nevertheless, given the scale of Spirit's likely aircraft purchase needs, the airline has been running out of time to make a decision.
The single fleet type wins out
According to the agreement announced on Wednesday, Spirit Airlines will place a firm order for 100 A320neo-family jets. It plans to take a mix of A319neos, A320neos, and A321neos, with deliveries between 2022 and 2027. The airline will also have options for another 50 aircraft.
Spirit will have substitution rights between the three models, so it can choose which specific models to receive based on demand and other business considerations. It also has the right to switch some orders to the smaller A220 family, but CFO Scott Haralson told investors during the company's Q3 earnings call on Thursday morning that the carrier has no intention of doing so.
Haralson also acknowledged that this 100-aircraft order doesn't cover Spirit's full requirement for the 2022 to 2027 period, particularly in the earlier years. The company plans to supplement its orders from Airbus by leasing additional A320neo-family jets.
Spirit goes with the safer choice
This aircraft order will benefit Spirit Airlines in several ways. First, because of its rapid growth, the company will quickly get a substantial benefit from the A320neo family's 16% fuel burn reduction compared to older A320-family jets. Today, A320neos account for just 10% of Spirit's fleet, but they will make up more than a third of the fleet by the end of 2021. Depending on whether Spirit Airlines retires any of its older aircraft, the A320neo family could represent 70% or more of the airline's fleet by the end of 2027.
Second, Spirit Airlines got better pricing and improvements on other terms from Airbus compared with its previous A320neo order. This isn't very surprising, as it is an established airline now, with 136 aircraft in its fleet. By contrast, when Spirit placed its last order nearly eight years ago, it was a relatively unproven company that operated 37 jets and had just gone public.
Third, by choosing the A320neo family rather than any of the other contenders, Spirit Airlines will avoid the operational complexity of having multiple fleet types. The A220 and the Embraer E195-E2 are definitely better-suited to lower-demand routes than the A319neos Spirit plans to buy. Still, they might not offer enough savings to offset the cost and risk of this complexity.
Picking a different aircraft type to supplement the A320neo would have been a more enterprising move compared to Spirit's decision to stick with a single fleet type. However, in light of the company's recent operational miscues and volatile performance, keeping things simple makes a lot of sense for Spirit Airlines.