Air Freight News

Allegiant investors punish airline for adding Boeing to fleet

Allegiant Airlines tumbled the most in 18 months after the carrier reversed its strategy of keeping costs in check by flying only Airbus SE planes, ordering 50 Boeing Co. 737 Max jets.

Under the deal, which has a total value approaching $2.5 billion, the airline will buy two versions of the Max to be delivered from 2023 through 2025, Allegiant Travel Co. said in a statement Wednesday. The carrier has options to purchase an additional 50 aircraft.

“The operating economics are terrific,” Allegiant Chief Financial Officer Greg Anderson said in an interview. “When we see the numbers, it makes a lot of sense. We drove a heck of a deal.” Allegiant has previously relied mostly on used or leased aircraft.

Investors appeared anxious about the purchase, sending Allegiant’s shares down 8.8% to $176.12, logging the biggest drop since June 2020. Low costs are essential to support the airline’s model of offering heavily discounted, bare-bones fares while charging for items such as coffee and bottled water. Boeing and American depositary receipts of Airbus were little changed.

Allegiant is taking 20 Max 737-8-200 models and 30 of the smaller Max 737-7. The Max 8 has a base value of $51 million, according to Avitas. The aircraft appraiser doesn’t offer a going price for the Max 7, which hasn’t yet entered commercial service.

For Boeing, the purchase takes some of the sting out of December losses, when long-time customers Qantas Airways Ltd. and Air France-KLM selected Airbus jets over the Max for their narrow-body fleets. Boeing has won large orders from U.S. airlines as it works to re-establish the Max as a reliable workhorse following two fatal crashes and groundings of more than two years in some countries.

Covering the cost of new planes typically means keeping them in the air as much as possible. That could threaten Allegiant’s practice of varying its flight schedule daily for demand, Savanthi Syth, a Raymond James Financial Inc. analyst, said in a note ahead of the order announcement.

Adding a second fleet type also increases expenses for crew training and parts inventory.

“I’m not surprised that they went with new equipment but I’m shocked they ended up with a different type,” said Andrew Levy, a former Allegiant president who now leads startup Avelo Airlines. “It’s really incredibly hard to manage a second type, and I just really don’t understand why they would want to take it on.”

Allegiant’s Anderson said the airline is banking on the jets’ favorable price, which he didn’t specify, as well as a 12-year maintenance agreement with engine provider CFM International Inc., to help lower operating costs. The Max will have more seats per plane and reduce fuel consumption by 20% compared with the airline’s oldest Airbus planes.

The carrier will need to increase its pilot corps about 5%. Allegiant expects to continue enlarging its fleet by 10% annually and will need as many 150 planes over the next six years.

The airline considered Airbus offerings, including the A320neo and A220, as well as purchasing used planes, Anderson said.

Allegiant bought new aircraft for the first time in July 2016 when it agreed to purchase a dozen Airbus A320s to speed its shift to a single fleet and shed older Boeing planes. The airline completed the transition to one manufacturer in late 2018. Allegiant currently operates 108 Airbus A319s and A320s and it has projected having 127 aircraft in service by year-end. The order announced Wednesday calls for delivery of 10 Boeing planes in 2023, 24 in 2024 and 16 in 2025.

The duel between Boeing and Airbus has taken on particular urgency as airlines chart fleet plans to match demand that is expected to surge once the coronavirus pandemic fades. Carriers are also scrapping older jetliners in favor of more fuel-efficient, lower-emission models to address concerns about climate change.

Such plans, plus a fair number of Max jets available for near-term delivery, last year helped Chicago-based Boeing notch its largest annual sales tally since 2018. While final 2021 figures haven’t been released, Boeing had landed 829 gross orders through the end of November—more than the previous two years combined.

Bloomberg
Bloomberg

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© Bloomberg
The author’s opinion are not necessarily the opinions of the American Journal of Transportation (AJOT).

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