In early October, Alaska Air (NYSE:ALK) gave investors a big hint that it plans to phase out its Airbus A320-family jets and return to an all-Boeing (NYSE:BA) fleet. The airline announced that it would take an impairment charge for the 10 A320s it owns -- the vast majority of its Airbus fleet is leased -- and retire those planes early.
Last Monday, Alaska provided more details about how it will execute its upcoming fleet transition. The company reached an agreement to sell its 10 owned A320s to Air Lease Corporation (NYSE:AL) in exchange for leasing 13 new Boeing 737 MAX 9s.
Alaska Air recorded a $121 million impairment charge in its third-quarter earnings as it reduced the book value of its 10 owned A320s to their estimated market value. However, that didn't clarify how the company would actually dispose of those planes. Due to the pandemic, it's hard to sell used jets at any price right now.
The deal with Air Lease solves that problem. The sale proceeds will mostly offset the prepayment of approximately $272 million of debt secured by those 10 aircraft. Alaska Airlines will lease the planes back on a short-term basis, returning them to Air Lease as the first 10 leased 737 MAX 9s are delivered.
Alaska Airlines will receive its first Boeing 737 MAX 9s under this lease agreement in the fourth quarter of 2021. All 13 will arrive by the end of 2022. The carrier says that they will be 20% more fuel efficient than its A320s. The 737 MAX 9s will also have lower nonfuel unit costs than the A320s they replace, largely because they can hold about 20% more seats.
From Air Lease's perspective, this agreement with Alaska allows it to place 13 737 MAX jets at a time when few airlines are looking for aircraft. Air Lease has 126 outstanding firm orders for the 737 MAX, making it one of the type's top customers -- and by far its biggest customer among aircraft leasing companies. Re-leasing the A320s it is buying from Alaska shouldn't be too difficult by comparison. The planes were built in 2015 and 2016, so they are quite young. By 2022, there will be plenty of airlines that need to replace aging aircraft but would appreciate the savings of leasing a lightly used jet versus buying or leasing a brand-new 737 MAX or A320neo.
What does this mean for Alaska's fleet plan?
Alaska Air says that the 13 737 MAX 9s it is leasing are incremental to the 32 it has on order directly from Boeing. Investors will have to wait for Alaska Air's year-end report to learn more about how the Air Lease deal impacts its future fleet plan.
Nevertheless, it's reasonable to guess that Alaska will defer some of its existing orders to make room in its fleet for the jets it is leasing. After all, the carrier currently plans to put just five 737 MAX jets into service by next summer, whereas it entered this year expecting to take 10 737 MAX deliveries by the end of 2020. That doesn't make it seem like Alaska wants to grow its 737 MAX fleet extremely rapidly.
Alaska's 737 MAX order book calls for it to take 18 deliveries by the end of 2021, with most of the 14 remaining orders to be delivered in 2022. However, the company is working with Boeing to reschedule deliveries. Taking mostly leased aircraft in the near term would make sense, as it would enable Alaska Air to hold down capital expenditures and focus on repaying debt. Deferring some 737 MAX deliveries from 2021 and the first part of 2022 into late 2022 and 2023 would then align Alaska's delivery schedule with scheduled A320 lease expirations.
Transitioning from a mixed fleet back to an all-Boeing 737 fleet will simplify Alaska Airlines' operations and should unlock substantial cost savings. The inherent efficiency of larger, state-of-the-art planes compared to the A319s and A320s that Alaska is phasing out will provide additional savings. This should power a strong earnings rebound over the next few years. Alaska Air's deal to sell the 10 A320s it owns to Air Lease in exchange for leasing 13 737 MAX 9s will help the airline accelerate this post-pandemic recovery.