Last month, Alaska Air (NYSE:ALK) continued its journey back toward an all-Boeing (NYSE:BA) fleet. The Alaska Airlines parent agreed to sell the 10 Airbus (OTC:EADSY) A320s it owned to aircraft leasing company Air Lease in exchange for entering long-term leases for 13 737 MAX 9 jets. On Tuesday, Alaska took an even bigger step toward returning to a single fleet type. The airline announced an agreement to buy 23 additional 737 MAX 9s -- along with 15 options -- which will allow it to retire the last of its A320s in 2023. Let's see what this deal means for Alaska Air and Boeing.
Topping up the 737 MAX order
Alaska Airlines doesn't have any 737 MAX jets in its fleet today, but as of mid-November, it had 32 firm orders with Boeing. The agreement with Air Lease late last month expanded its order book to 45 737 MAX 9s. Most of those jets were scheduled for delivery in 2021 and 2022.
Following the agreement in principle announced this week, Alaska Airlines has firm orders for 68 737 MAX 9s (including those that will be leased), with 52 additional options. The first 13 planes will come next year -- a reduction from previous plans -- with 30 more scheduled for delivery in 2022, followed by 13 in 2023 and the final 12 in 2024. The 52 options can be exercised for deliveries between 2023 and 2026.
Because of the deferral of some aircraft deliveries out of 2021, this new order significantly reduces Alaska Air's capital expenditure commitments next year. The low-fare airline now expects to spend just $150 million to $250 million on capex in 2021, $450 million lower than its previous plan. However, capex will ramp up steeply to an estimated $1.3 billion to $1.4 billion in 2022.
Alaska's deal with Boeing does incorporate "slide rights," allowing the airline to defer some capex depending on how quickly demand recovers from the COVID-19 pandemic. The airline could use those rights to reduce 2022 capital spending by up to $300 million, if necessary.
Accelerating the Airbus fleet retirement
In conjunction with the new Boeing agreement, Alaska Airlines said that it will retire another 20 of its Airbus jets immediately. It will incur a special charge of approximately $200 million to $250 million related to lease return costs and writing off remaining lease assets associated with those aircraft. This will reduce its Airbus fleet to 31 aircraft -- 21 A320s and 10 A321neos -- by year end, down from 72 at the beginning of 2020.
All of Alaska's Airbus fleet is leased. The vast majority of those leases expire by 2023, but the last nine A320 leases expire in 2024 and 2025, and the A321neo leases extend to around 2030. Nevertheless, Alaska Air plans to phase out all of its A320s by the end of 2023, with eight retirements in 2022 and the final 13 A320s being retired in 2023. That will leave the A321neos as the only remaining Airbus planes in Alaska's fleet.
One big decision left for Alaska Airlines
While Alaska Air is incurring substantial costs related to accelerating the retirement of its Airbus fleet, the move will significantly improve its profitability going forward. Most of the carrier's A320s hold 150 seats. By contrast, the new 737 MAX 9s will be configured with 178 seats, but will have similar operating costs. Effectively, Alaska is getting 28 extra seats for free, driving meaningful unit cost reductions.
By contrast, the A321neo (like the 737 MAX) features next-generation engine technology to reduce fuel burn. Moreover, each one holds 190 seats, leading to excellent unit cost performance. The A321neo also has better runway performance than its Boeing counterparts, allowing it to operate key routes that the 737 MAX 9 couldn't handle.
However, there would be significant costs to maintaining a fleet of just 10 Airbus jets separate from over 200 Boeing 737s. As a practical matter, Alaska Airlines needs to either grow its A321neo fleet significantly to gain economies of scale or get rid of it altogether. Given that Alaska is touting how this week's deal "moves the airline substantially toward a single, mainline fleet," the company seems to be leaning toward the latter option.
A mild disappointment for Boeing
Getting another 737 MAX commitment is important for Boeing, as the 737 MAX backlog has eroded dramatically this year. That said, this deal for 23 aircraft doesn't move the needle for an aircraft manufacturer that has removed over 1,000 orders from its backlog year to date. Alaska Airlines placed a conservative order that doesn't even return the fleet to its 2019 size by the end of 2023. With a more aggressive growth and replacement plan, Alaska could have conceivably placed an order for 100 or more 737 MAX 9s this week.
Moreover, Alaska hasn't committed to replacing its A321neos. That leaves a small window of opportunity for Airbus to win future business from Alaska Airlines. Boeing (and its shareholders) should be glad that it has a few more orders in hand, especially for 2022, when it hopes to ramp up 737 MAX production. Nevertheless, it's too early to uncork the champagne.