Last month, executives at Alaska Air (NYSE:ALK) reiterated their expectation of a quick post-pandemic demand recovery in the airline's markets. As a result, Alaska plans to boost capacity back to 2019 levels by next summer.
However, Alaska Airlines' fleet plan wasn't really consistent with management's bullish outlook. As of last month, the airline expected to have fewer planes in its fleet at the end of 2023 than it did at the beginning of 2020. That changed last week, though, as Alaska announced orders for 30 more jets from Boeing (NYSE:BA) and Embraer (NYSE:ERJ).
An incomplete recovery plan
Alaska Airlines ended 2019 with 332 aircraft in its fleet: 237 mainline planes and 95 regional aircraft. At that time, it planned to expand the mainline fleet by 246 jets while removing one turboprop from its regional fleet during 2020.
The COVID-19 pandemic upended this plan. During 2020, Alaska accelerated its transition away from the Airbus fleet it inherited from Virgin America, retiring all 10 of its A319s and 30 of its 51 A320s. It ended the year with just 291 aircraft in its fleet, including 197 mainline jets: far below its pre-pandemic plan.
In late 2020, Alaska Airlines announced a pair of deals to expand its Boeing 737 MAX order book, largely to replace its Airbus fleet. This gave it firm orders for 68 737 MAX 9s -- with 43 scheduled to arrive by the end of 2022 -- along with 52 options. However, even after these changes, Alaska projected that it would exit 2022 with 232 mainline aircraft: fewer than it had before the pandemic. Furthermore, Alaska estimated that it would expand its fleet by just three aircraft in 2023: all regional jets.
To be fair, Alaska's Boeing 737 MAX 9s have 178 seats, compared to 150 for its A320s and even fewer for its A319s. Thus, the airline doesn't need quite as many planes to operate the same amount of capacity. Alaska Airlines could also increase aircraft utilization somewhat to help it return to 2019 capacity levels despite having a smaller fleet.
That said, Alaska's fleet plan wasn't entirely consistent with management's bullishness about the air travel recovery. Most notably, it didn't allow for much growth in 2023.
On Wednesday, Alaska Airlines announced orders for 17 additional Embraer E175 regional jets and 13 more Boeing 737 MAX 9s. The first 13 E175s will arrive in 2022, with at least eight entering service during the first half of the year (i.e., prior to the summer season). The final four will enter the fleet in 2023.
Meanwhile, Alaska exercised 13 of its 737 MAX options. Nine of those incremental 737 MAX 9 deliveries will come in 2023, with the remainder arriving in 2024.
The extra E175s will help Alaska in its goal of returning to 2019 capacity levels by next summer by allowing it to add flights in smaller markets that can't support mainline service. (The E175s could also enable more frequent flights in larger markets.) The additional 737 MAX 9 deliveries will then permit Alaska Airlines to return to growth in 2023, with further expansion in 2024.
Good news for Alaska and Boeing, better news for Embraer
Alaska Airlines' focus on the domestic market and a few nearby international destinations positions it to recover from the pandemic faster than full-service global airlines. Its entry into the oneworld airline alliance will also boost demand for its flights from travelers connecting to long-haul flights in Alaska's West Coast focus cities.
Yet until now Alaska Airlines didn't have enough aircraft on order to support this potential demand growth. Last week's orders will help the airline capitalize on its growth opportunities while also continuing its fleet transition away from the A320.
Boeing should also be happy about Alaska's decision to buy more 737 MAX jets. That said, 13 additional orders won't go very far in replenishing the 737 MAX order book, which shrank by more than 1,000 units last year.
That makes Embraer the real winner of Alaska's fleet decisions. The struggling Brazilian plane maker had just 272 firm orders on the books at the end of last quarter. That total included 100 E175 orders from U.S. regional carrier Republic Airlines that won't be delivered until Republic places those planes with major airlines. It also included 59 E195-E2s destined for Azul Brazilian Airlines (either directly or on lease). Those deliveries have been deferred until at least 2024.
Embraer's commercial jet deliveries plunged by 50% in 2020 (from 89 to 44). Its puny backlog put it at risk of even deeper production cuts in 2022. Getting 17 new E175 orders -- mostly for delivery next year -- will stave off that worst-case scenario, helping Embraer live to fight another day.