Over the past year, United Airlines Holdings (UAL 0.12%) has consistently been one of the most "realistic" U.S. airlines with respect to the COVID-19 pandemic. Management quickly recognized that the pandemic could have an unprecedented impact on demand. Moreover, the company has been cautious in its short-term planning, expecting a slow and volatile recovery. United will hold capacity at very low levels at least through the first quarter of 2021.
Nevertheless, when United filed its 2020 annual report last week, it revealed that it recently ordered 25 more 737 MAX jets from Boeing (BA +2.74%). Let's look at why the airline may have placed this order and what it means for United Airlines -- and for Boeing.
United had gutted its near-term order book
United Airlines is one of Boeing's biggest customers for the 737 MAX. As of the end of January, it had 158 unfilled orders for the troubled jet. However, during the depths of the pandemic last year, United deferred a huge swath of 737 MAX deliveries.
As of Dec. 31, 2019, United had planned to receive 44 737 MAX deliveries in 2020 alone. By Sept. 30, 2020, it planned to take just 40 737 MAX jets in 2020 and 2021 combined -- and none at all in 2022.
Image source: United Airlines.
This restructuring of its Boeing order book reflected United's view that demand would probably recover slowly. Furthermore, United Airlines didn't commit to any large-scale fleet retirements during 2020 (unlike some of its rivals), so it didn't have any urgent aircraft replacement needs.
With vaccines now rolling out quickly, it seems likely that demand will bounce back in a big way over the next year or so. United is responding by restructuring its 737 MAX order book once again.
Getting more bullish on 2022 (and 2023)
On Feb. 26, United ordered 25 additional Boeing 737 MAX jets for delivery in 2023. Even more significantly, it rescheduled 40 deliveries to 2022 and five to 2023. Following these changes, the full-service airline is set to receive 21 737 MAX jets in 2021, 40 in 2022, and 54 in 2023. It has 73 additional 737 MAX orders scheduled for delivery after 2023.
These orders will enable United Airlines to rebuild domestic capacity to at least 2019 levels by 2023. Realistically, many will also be used to replace older jets due for retirement. With jet fuel prices rising again, upgrading the fleet with new, fuel-efficient aircraft is becoming more important.
U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price, data by YCharts.
Most notably, the vast majority of United's 96 Airbus A320s are more than 20 years old, with some built as early as 1993. Additionally, nearly 100 of the airline's Boeing 737s are already at least 20 years old.
But why order more jets?
United Airlines' desire to get Boeing 737 MAX jets sooner doesn't fully explain its decision to order 25 more. After all, United entered 2021 with 163 firm orders for the 737 MAX, and the revised order book calls for 115 deliveries over the next three years. Rather than ordering more aircraft, the airline could have achieved that schedule by accelerating additional deliveries from 2024 and beyond into 2023.
This suggests that Boeing dangled big discounts to get United Airlines to expand its order book. For United, there's little risk in ordering additional narrow-body jets like the 737 MAX. The carrier has massive aircraft replacement needs, as the vast majority of its fleet dates to 2002 or earlier. There's no shortage of ways that United could use additional 737 MAX jets over the next decade.
For Boeing, United's recent 737 MAX order is good news. It provides assurance that one of its key customers will continue to lean heavily on the 737 MAX for its fleet replacement needs, rather than turning to the Airbus A320neo family or the used aircraft market.
That said, investors shouldn't exaggerate the significance of this order. United Airlines is one of Boeing's largest, most loyal, and most stable customers. Sealing a deal for 25 extra 737 MAX jets is better than nothing, but it doesn't move the needle relative to the 1,000-plus orders that Boeing removed from its backlog last year. Moreover, Boeing doesn't have a deep bench of other big customers it can turn to as it looks to rebuild its backlog.
