Apr 14, 2019 at 4:10PM Boeing's newest version of its workhorse 737 family of jets, the 737 MAX, has been grounded for more than a month, following a pair of fatal crashes. Between the damage to Boeing's reputation and travelers' fears about the safety of the 737 MAX, some airlines are now looking to cancel their Boeing 737 MAX orders. However, Alaska Air could be moving in the opposite direction. If anything, the ongoing crisis at Boeing makes it more likely that Alaska will place a big Boeing 737 MAX order later this year, allowing it to replace the fleet of Airbus A320-family planes that it inherited from Virgin America. This is the year Alaska will make its big fleet decision Many low-fare airlines operate just one aircraft type, to simplify pilot training, crew scheduling, and maintenance.
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Before the 2016 deal that brought them together, Alaska Airlines and Virgin America both followed this strategy. However, they had chosen different fleet types: Alaska flew only Boeing 737s, while Virgin America used Airbus A320-family planes.
Alaska Airlines used to exclusively fly Boeing 737s. Image source: Alaska Airlines. As a result, Alaska Airlines now has a mixed fleet.
As of the end of 2018, its mainline passenger fleet consisted of 159 Boeing 737s and 71 Airbus A319s, A320s, and A321neos. At the time of the merger, Alaska's management planned to whether to keep the Airbus planes or replace them with Boeing 737s. However, executing the merger was tougher than expected, leading to sharp profit erosion. That meant Alaska Airlines had bigger fish to fry - and reducing near-term capex became a priority - so the fleet decision was delayed. Late last year, management indicated that it planned to make a final decision in 2019. The case for returning to an all-737 fleet There are two main reasons Alaska Airlines should consider replacing its Airbus fleet in the coming years.
First, in 2017, it estimated the incremental costs of operating two aircraft types at $20 million to $25 million annually. If anything, that projection could be too low, as Alaska Airlines executives have indicated that they of operating a mixed fleet. Second, prior-generation A319s and A320s make up the vast majority of Alaska's Airbus fleet.
Replacing those planes with Boeing 737 MAX aircraft would allow the airline to upgrade its fleet to at an accelerated pace. Alaska Airlines has been debating whether to replace Virgin America's Airbus fleet. Image source: Alaska Airlines. Alaska Airlines probably intends to keep its Airbus fleet for at least a few more years, given that it's in the midst of refurbishing those planes. That project is set to wrap up by the end of 2019. But it wouldn't be hard for Alaska Airlines to return to an all-Boeing fleet by 2025 or 2026.
Indeed, 53 of its 63 A319s and A320s are leased, and none of those leases extend past 2025. The majority expire in 2022 and 2023.
The potential losses from selling the 10 Airbus A320s that Alaska Airlines owns should be relatively modest. The biggest complication would be getting rid of its A321neos, of which Alaska has eight, with two more on the way. Those aircraft are leased, with expiration dates around 2030.
But given the extreme popularity of that model, it probably wouldn't cost much to exit those leases early. The elephant in the room might not matter Given that a poorly designed software system in the Boeing 737 MAX probably contributed to two tragic accidents in the past six months, it might seem strange for Alaska Airlines to double down on the Boeing 737 MAX this year. And indeed, Alaska may hesitate to dramatically expand its 737 MAX order - it already has 32 on the way -. However, Boeing has already developed a software fix, cockpit changes, and enhanced pilot training procedures to prevent a repeat of the recent tragedies. It has completed nearly 100 successful test flights with the new software.
Boeing is close to submitting its solution to the FAA and other aviation safety regulators. If all goes well, the grounding of the 737 MAX could be lifted worldwide by the summer. At that point, Boeing could be anxious to reinvigorate the 737 MAX program's sales momentum, particularly if a significant number of customers cancel their orders. As a result, it may be willing to offer especially big discounts to secure an order from Alaska Airlines that could exceed 100 planes, including both replacement of the Airbus fleet and growth aircraft.
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The biggest advantage of maintaining a mixed fleet, according to Alaska Air's 2017 investor day presentation, was the potential to reduce aircraft purchase costs by pitting Boeing and Airbus against one another for every sale. Now, Boeing's 737 MAX fiasco could give the carrier an opportunity to secure rock-bottom prices for up to a decade of aircraft purchases. That might be all the incentive Alaska Airlines needs to commit to a big Boeing 737 MAX order and begin the process of returning to a single fleet type.
And Australia on Tuesday banned the use of Boeing 737 MAX aircraft in their airspace following a deadly plane crash in Ethiopia on Sunday. The Civil Aviation Authority of Singapore (CAAS) said in a statement that it was 'temporarily suspending operation of all variants of the Boeing 737 MAX aircraft into and out of Singapore in light of two fatal accidents involving Boeing 737 MAX aircraft in less than five months.' Hours later, Australia's Civil Aviation Safety Authority followed Singapore's lead with a temporary suspension to review the risks, citing the best interests of safety. The Ethiopian Airlines Boeing 737 MAX 8 to Nairobi on Sunday, killing all 157 people on board. This came just months after a Lion Air jet of, killing 189.
The move comes as airlines around the world remove the model from their schedules, while US regulators have ordered Boeing to make urgent improvements to the jet. Singapore's suspension will take effect from 2pm local time (06:00 GMT), the authority said. It also said SilkAir, the regional wing of Singapore Airlines, operates six Boeing 737 MAX aircraft. Other airlines operating the planes to Singapore are China Southern Airlines, Garuda Indonesia, Shandong Airlines and Thai Lion Air. The regulator said it was working with the city-state's Changi Airport - a major global hub - and affected airlines to minimise any effect on passengers.
'During the temporary suspension, CAAS will gather more information and review the safety risk associated with the continued operation of the Boeing 737 MAX aircraft into and out of Singapore,' it said. 'The suspension will be reviewed as relevant safety information becomes available.' Grounded planes Also on Tuesday, a South Korean airline, Eastar Jet, suspended operation of its two Boeing 737 MAX 8 planes. The aircraft will be replaced by Boeing 737-800, starting Wednesday, on routes to Japan and Thailand, according to the airline official who did not want to be named, citing office rules. On Monday, also ordered domestic airlines to suspend commercial operation of the Boeing 737 MAX 8 until after 'confirming the relevant measures to effectively ensure flight safety'. Said it was also grounding its 11 jets of the same type.
Ethiopian Airlines has done the same 'until further notice', so did Gol in Brazil, Argentina's state airline Aerolineas Argentinas and Mexico's Aeromexico. On Tuesday, India's Jet Airways said it grounded its five Boeing 737 Max 8 aircraft, saying it is not flying any of the 737 Max planes in its fleet and is 'in contact with the manufacturer'. Air Italy, Oman Air, Turkish Airlines and Russian airline S7 said they were closely following the ongoing investigation into the crash and were in contact with Boeing, but the aircraft would continue to fly as scheduled. Jens Thordarson, the operations chief of Icelandair, which flies three Boeing 737 MAX 8s, said that it would be 'premature' to link the crashes in Ethiopia and Indonesia. For now, 'nothing pushes us towards the slightest action,' he said. Norwegian Air Shuttle, which has 18 aircraft of the same type in the air, and Flydubai also have confidence in their planes.