Alaska Airlines (NYSE: ALK) on Monday doubled down on the Boeing 737 MAX less than a week after the Federal Aviation Administration lifted a 20-month safety grounding. The airline plans to lease more than a dozen of the modern aircraft and sell off less economical Airbus A320s to help its balance sheet.
The moves suggest that Alaska Airlines may return to an all-Boeing fleet, although officials have said they are very happy with the Airbus A321neo.
Alaska said it will sell 10 single-aisle A320s to Air Lease Corp. and lease 13 new Boeing 737-9 MAX aircraft, which will be delivered starting in the fourth quarter of 2021 through 2022. Alaska will then lease the A320s, which were recently designated for retirement, back from Air Lease until the delivery of the first 10 MAX aircraft.
Parent company Alaska Air Group said it used the proceeds of the sale to pre-pay $272 million in debt.
Alaska suffered a third-quarter adjusted net loss of nearly $400 million, with revenue plunging 71% from the same 2019 period. Last week, it warned that November passenger traffic and revenue could retreat after sequential monthly growth in October because bookings remain erratic given seasonal fluctuations, the resurgence of COVID-19 and increased travel restrictions.
CFO Shane Tackett said during the company’s earnings call with analysts last month that Alaska planned to reduce fleet ownership costs by either extending at lower rates 42 of 61 onerous Airbus leases scheduled to expire over the next three years, or replacing them with larger, more efficient aircraft.
The MAX has a larger maximum payload and can carry up to 30 more passengers than the A320, depending on the respective configurations.
Airlines, looking for every possible savings, are opting to keep their most efficient aircraft and get rid of models that cost more to operate as they downsize to match lower demand expected for at least three years while the global economy and travel industry recover from the coronavirus-induced downturn.
The MAX aircraft are 20% more fuel efficient and generate 20% less carbon emissions per seat than the A320s they will replace. They are also able to fly 600 miles farther than the current A320, which Alaska Air said opens the door to additional nonstop routes and new destinations.
Preparing for 737 MAX
The 13 leased aircraft are in addition to the 32 MAX aircraft Alaska currently has on order with Boeing. The FAA’s recertification of the 737 MAX gives airlines permission to begin the process of bringing the aircraft back into service. Alaska said last week the first 737-9 MAX is scheduled for delivery in early 2021 and will begin passenger service in March. It expects to be flying five of the aircraft by midyear.
American Airlines will be the first airline to have the MAX back in revenue starting Dec. 29 between New York and Miami. United is expected to bring the aircraft back into service during the first quarter of 2021, while Southwest Airlines is shooting for a second-quarter restart.
Boeing made improvements to the flight control system, and the FAA is mandating additional pilot training after the MAX was originally touted as an easy transition for pilots certified on earlier 737 models. The Maneuvering Characteristics Augmentation System, designed to help pilots avoid potential stalls during takeoff, will now read information from two sensors that monitor the angle of the plane instead of just one. If the sensors disagree, pilots will be alerted and MCAS will be shut off and they will have the power to override the system.
About 400 737 MAX aircraft were in operation before regulators grounded them, and Boeing has since produced 450 more that are sitting in storage.
Airlines will need to update flight manuals for the new operating protocols and put pilots through two hours of simulator training on the MAX. Parked MAX aircraft will also need to undergo maintenance and flight tests to make sure they are in working order, with Alaska saying it will conduct 50 hours worth of proving flights around the country to confirm its safety assessments and ensure a full understanding of the airplane’s capabilities in different climates and terrain.
The flights will be supervised directly by the FAA with representatives on board to evaluate whether pilots can safely operate the aircraft. Under new procedures, the FAA will issue the airworthiness certificate for each aircraft — a step previously carried out by Boeing.
Several airlines were anxious for the no-fly order to be lifted last year because the MAX figured prominently in expansion plans, but with the market for passenger travel severely wounded by coronavirus restrictions and infection fears, airlines are expected to bring back capacity slowly. Some consumers could still be reluctant to fly the MAX after two crashes that killed 340 people, despite the approved fixes by Boeing.
“I’m very confident with all the steps the FAA and Boeing have taken and the steps we’re taking at Alaska to prepare us to safely bring this aircraft into our fleet,” said Max Tidwell, Alaska’s vice president of safety and security, in a statement.
Seattle-based Alaska Air added Airbus aircraft to its fleet when it acquired Virgin America in 2016. It permanently parked all A319s and some A320s last summer. The Air Lease deal leaves Alaska with 39 A320s in the operating fleet along with 10 A321neos, a more fuel-efficient member of the A320 family.
Over the weekend, Delta Air Lines CEO Ed Bastian told the Financial Times the airline might consider ordering 737s.
The MAX has modest value from a cargo standpoint, although it is bigger than its predecessors. Narrow-body planes typically carry mail, express parcels and smaller freight and e-commerce business that can fit through the narrow doors used for baggage. Full loads aren’t normal because they often serve markets with limited cargo demand.
Alaska is using a 737-900 in a cargo-only configuration to increase cargo revenue while passenger traffic remains slow. The company also operates three 737-700 freighters.