After operating an all-Boeing (NYSE:BA) mainline fleet for years, Alaska Air (NYSE:ALK) added Airbus (OTC:EADSY) planes to the mix when it acquired smaller rival Virgin America in late 2016. At an investor meeting in early 2017, Alaska's management suggested that it was weighing the relative benefits of maintaining a mixed fleet versus going back to Boeing exclusivity. For various reasons, the final decision has been postponed repeatedly over the past few years.
During 2020, there have been some hints that Alaska Airlines was leaning toward a return to its Boeing roots. On Thursday, the airline provided the clearest sign yet that its Airbus A320 family jets are on the way out.
COVID-19 prompts a reduction in the Airbus fleet
Entering 2020, Alaska Airlines had 71 Airbus jets in its fleet, compared to 166 Boeing 737s. Furthermore, all of its firm orders for mainline aircraft are for the 737 MAX, although Alaska also has 30 cancelable orders for the A320neo.
All but 10 of Alaska's Airbus planes are leased, and about two-thirds of those leases are scheduled to expire between 2021 and 2023. Thus, Alaska has a unique opportunity to rapidly transition away from its Airbus fleet over the next few years if it wants to.
The COVID-19 pandemic led Alaska Airlines to accelerate this transition. Earlier this year, the carrier disclosed that it had permanently parked 12 Airbus jets, including all 10 of its A319s. In conjunction with that move, it retrained 240 of its Airbus pilots to fly Boeing 737s. Management indicated that these planes would eventually be replaced by 737 MAX jets already on order.
Alaska Airlines sets future plans
In an SEC filing last Thursday, Alaska said that it had decided to go ahead with borrowing up to $1.9 billion from the federal government under a secured loan program included in the CARES Act. Buried near the end of the filing was a statement that "management has authorized a plan to retire 10 owned Airbus A320 aircraft earlier than previously scheduled," leading to an impairment charge between $115 million and $125 million.
The filing doesn't say when the A320s will be retired, but chances are it will be sometime in the next five years. (It wouldn't make sense to take an impairment charge now for a retirement expected in the late 2020s or beyond, simply because so much could change in the intervening years.)
As noted above, only 10 of Alaska's A320s are owned: The rest are leased. The 10 owned A320s were delivered new to Virgin America between 2015 and 2016 and are just under five years old, on average. Setting plans to retire aircraft that still have two decades of life left would only make sense in the context of fleet simplification.
Within Alaska's Airbus fleet, the only leases that extend beyond 2025 are 10 A321neo leases that expire around 2030. Given that long-term demand for that model is expected to remain robust, it probably wouldn't cost much for Alaska Airlines to end those leases a few years down the road. Retiring and selling the 10 owned A320s would then enable the low-fare airline to move back to an all-Boeing mainline fleet by 2025 or so.
A good time to make a deal
From Alaska's perspective, the timing of this potential move back to an all-Boeing fleet couldn't be better. Boeing has booked firm orders for just 52 737 MAX jets since the beginning of 2019, due to the double-whammy of the 737 MAX grounding and the pandemic. Over the same period, it has removed over 1,000 737 MAX orders from its backlog due to order cancellations and customers falling into financial distress. Adding to Boeing's woes, the plane maker has dozens of 737 MAX jets in storage in need of buyers.
Just to replace its Airbus planes on a one-for-one basis, Alaska would need dozens of 737 MAX jets beyond what it already has on order. Including replacements for the oldest Boeing 737s in its fleet today and aircraft to support growth plans toward the middle of the decade, Alaska Airlines could easily order 100 or more 737 MAX jets for delivery over the next five to seven years.
Winning a deal of that size would be a big momentum booster for Boeing. The aerospace giant should be willing to offer big discounts to make it happen. Alaska Airlines' decision to further accelerate its A320 retirement plans is a sign that the carrier is looking to seize this opportunity to upgrade its fleet at a bargain price.