Alaska Airlines said Tuesday it has ordered 23 more Boeing 737 MAXs, bringing its total order to 68 MAXs that over the next three years will replace most of the Airbus aircraft in its fleet.
The financial terms Boeing offered would have been difficult to pass up. In an interview, Alaska Air Group chief executive Brad Tilden said the airline will have to pay no additional money for the 13 MAX planes it will take next year.
“This does not actually require any capital spending during 2021,” he said.
That’s because Alaska had already paid significant predelivery deposits on its pending orders of MAXs before the plane was grounded in March 2019. Boeing has now restructured the terms with discounts to compensate the airline and encourage the follow-on order.
The cheap Boeing MAXs will replace all of Alaska’s 51 Airbus A320s and 10 smaller A319s, most of which are on expensive leases inherited from Alaska’s acquisition of Virgin America. And since the MAX planes are 20% more fuel efficient and new jets should require less maintenance, Alaska expects to reap big operational cost savings.
“With each delivery, our ownership costs go down, our maintenance costs go down, our fuel costs go down, and the revenue should go up because the MAX 9 has 28 more seats than the A320,” said Tilden. “The economics are going to be fantastic.”
For Boeing, such discounts on the MAX provide compensation to its customers for months of delayed deliveries, without actually giving out cash. And the deals help build sales momentum to arrest this year’s collapse of the MAX order backlog during the COVID-19 pandemic.
The MAX was grounded for 20 months after the deaths of 346 people in two crashes. Alaska’s is the second new order, after one from Ryanair, since the Federal Aviation Administration ungrounded the jet last month.
Alaska plans to have its first MAX enter service in March, with five more by summer 2021 and an additional seven by year-end.
The plan is to speed deliveries in 2022, with Alaska taking 30 MAXs, followed by 13 more in 2023 and 12 in 2024.
The total includes 13 it is leasing from Air Lease Corp. in a deal announced last month. The rest Alaska will purchase directly from Boeing.
Prior to the 2016 Virgin acquisition Alaska was an all-Boeing carrier, and the MAX deal will bring it almost back to that by 2023.
Alaska said it will keep its 10 larger, longer-range Airbus A321neos. Those jets largely will be used to fly the more popular transcontinental routes due to their superior performance over Boeing’s 737 MAX 10 model.
Alaska has already begun running its Airbus pilots through the retraining necessary to fly the MAX. Each must complete about 80 hours of training.
The airline acquired about 900 pilots when it bought Virgin, about 830 of whom are still with the airline. Alaska Airlines has about 2,850 mainline jet pilots in total. Tilden said that by 2023, the number of Airbus pilots will be reduced to about 145, flying the A321neos.
Doubling down on the MAX now illustrates Alaska’s contrarian strategy of investing amid a historic air-travel downturn so as to emerge stronger — “zigging while the others are zagging,” as Tilden put it.
He noted how Alaska expanded flights to the East Coast during the airline downturn that followed the 9/11 terrorist attacks and introduced flights to Hawaii during the global financial crisis of 2008.
Tilden said the airline’s relative strength in available cash, its low fares and its fleet of efficient single-aisle jets — with no exposure to the long-haul international market flown by the bigger widebody jets — will see it through the coronavirus crisis and leave it ready to grow once the pandemic ends, taking market share from carriers that are forced to shrink.
While the 68 MAX planes on firm order are purely for replacing aircraft that will be retired, should air travel recover well and allow for growth, the agreement with Boeing also includes options to buy an additional 52 MAXS on good financial terms later.
Alaska has about 200 mainline jets in its fleet today, down from 237 before the pandemic. With the MAXs on firm order, it will go back up to about 230 mainline jets for the next four years. And if Alaska takes advantage of the MAX purchase options, the fleet could grow to 300 aircraft by 2026.
In a statement, Boeing Commercial Airplanes chief Stan Deal said Alaska “is well positioned to return to its growth trajectory and strengthen its standing as one of the top U.S. airlines.”
Tilden said the terms of the deal also take account of the risk that the pandemic’s effects may be more prolonged.
“Boeing has been flexible in terms of the timing of payments and timing of deliveries should the recovery from the crisis not be what we expect,” he said.
“We are bullish. No airline would choose to play this hand we are playing right now,” Tilden said. “But if you have to play it, Alaska is probably better positioned than any other airline.”
Tilden added that as well as being good for Alaska, the deal will help Boeing emerge from the MAX crisis, bolstering jobs and the region’s economy.
“We’re pleased to be standing side by side with Boeing,” he said.