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In early October, Alaska Air (NYSE: ALK) gave investors a big tip that he plans to phase out his Airbus A320 family jet and return to aBoeing (NYSE: BA) fleet. The airline announced it would take a write-down fee for the 10 A320s it owns – the vast majority of its Airbus fleet is leased – and retire those planes early.
On Monday, Alaska provided more details on how it will carry out its upcoming fleet transition. The company has reached an agreement for the sale of its 10 owned A320s Air Lease Corporation (NYSE: AL) in exchange for leasing 13 new Boeing 737 MAX 9s.
An advantage for everyone
Alaska Air recorded a $ 121 million impairment in third quarter earnings as it reduced the book value of its 10 owned A320s to estimated market value. However, that didn’t make it clear how the company would actually dispose of those planes. Due to the pandemic, it is difficult to sell used jets at any price right now.
The agreement with Air Lease solves this problem. The proceeds from the sale will largely offset the upfront payment of approximately $ 272 million of debt secured by those 10 aircraft. Alaska Airlines will return the aircraft in the short term, returning them to Air Lease as soon as the first 10 737 MAX 9 leased 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 they will be 20% more fuel efficient than to its A320. The 737 MAX 9s will also have lower non-fuel unit costs than the A320s they replace, largely because they can hold about 20 percent more seats.
From Air Lease’s perspective, this deal with Alaska allows it to place 13 737 MAX jets at a time when few airlines are looking for aircraft. Air Lease has 126 firm orders pending for the 737 MAX, making it one of the best customers of its type and by far its largest customer among aircraft leasing companies. Leasing the A320s he is buying from Alaska shouldn’t be too difficult in comparison. The planes were built in 2015 and 2016, so they are quite young. By 2022, there will be many airlines that will need to replace older aircraft, but would appreciate the savings from leasing a little-used jet compared to buying or leasing a brand new 737 MAX or A320neo.
What does this mean for the Alaska fleet plan?
Alaska Air says the 13 737 MAX 9s it is leasing are incremental to the 32 it has ordered directly from Boeing. Investors will have to wait for Alaska Air’s year-end report to learn more about how the Air Lease deal will affect its future fleet plan.
Image source: Alaska Airlines.
However, it is reasonable to assume that Alaska will postpone some of its existing orders to make room in its fleet for the jets it is chartering. After all, the carrier currently plans to put only five 737 MAX jets into service by next summer, while it entered this year with plans to make 10 737 MAX deliveries by the end of 2020. That doesn’t make it seem like Alaska wants to grow. its 737 MAX fleet is extremely fast.
Alaska’s 737 MAX order book expects 18 deliveries to be made by the end of 2021, with the majority of the remaining 14 orders to be delivered in 2022. However, the company is working with Boeing to reschedule deliveries. Taking most of the leased planes in the short term would make sense, as it would allow Alaska Air to contain capital expenditures and focus on repaying the debt. The postponement of some 737 MAX deliveries from 2021 and early 2022 to the end of 2022 and 2023 would therefore align Alaska’s delivery schedule with the scheduled A320 lease deadlines.
Moving from a mixed fleet to a full Boeing 737 fleet will simplify Alaska Airlines operations and should deliver significant cost savings. The inherent efficiency of larger, more state-of-the-art aircraft over the A319 and A320 that Alaska is gradually phasing out will provide further savings. This should fuel a strong rebound in earnings in the coming years. Alaska Air’s agreement to sell 10 A320s it owns to Air Lease in exchange for leasing 13 737 MAX 9s will help the airline accelerate this post-pandemic recovery.
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