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Now that the FAA has lifted its grounding order against the Boeing 737 MAX the airplane maker – and … [+] largest exporter in value of U.S.-made goods – has 450 already made planes that it must deliver, including more than 100 for whom no buyers have been lined up. Alaska Airline’s deal to lease 13 MAXs from Air Lease Corp. announced Monday is the first order placed for MAXs since the un-grounding on Nov. 18. (David Ryder/Getty Images)
Somebody had to be the first one to do it.
And it somehow seems appropriate that it was Seattle-based Alaska Airlines who became the first airline in the world to acquire new Boeing 737 MAX jets just three business days after the controversial MAX officially was released from its 20-month grounding by the Federal Aviation Administration. After all, Alaska is “home team” for Boeing, which though headquartered in Chicago since 2001 long has been an institution in the Seattle area, where its 737s are made.
Now, technically, Alaska – a distant No. 5 in the rankings of U.S. airlines by size behind American, Southwest, Delta and United – isn’t ordering new MAXs directly from Boeing. Rather, it cut a deal with Air Lease Corp., a large airplane leasing company run by the father of modern aircraft leasing, Steven Udvar-Hazy
Hazy, whose family fled to the United States when he was 12 to escape the Soviet occupation of their native Hungary, ranks 179th on the FORBES 400 list with an estimated worth of $4.1 billion. Air Lease Corp. originally ordered 139 MAX jets, in various size versions, 15 of which it had taken delivery of prior to the global grounding of MAX planes in March 2019.
Acquiring just 13 planes – which at an estimated price of around $125 million each makes the deal worth about $1.6 billion when calculated by theoretical sales price – does not qualify as a particularly large deal by industry standards. But make no mistake about it, Alaska’s move to quickly acquire 13 737 MAX 9s, which will be added to the 32 MAXs it already has in its fleet or on order, is still very much a big deal for both Alaska and Boeing.
It will it help Boeing bit in whittling down the global inventory of 837 built-but-out-of-service MAXs. Of those, 387 had been delivered to customers before the grounding 20 months ago. Another 450 or so were built after the grounding. And more than 100 of those 450 built-but-not-delivered MAXs currently parked at various Boeing facilities around the state of Washington are so-called “White Tails;” planes that are not sold or even promised to particular customers.
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Thus, even though the MAXs that Alaska will be getting from Air Lease Corp., won’t come from Boeing’s pool of homeless airplanes, Alaska’s acquisition sends a loud message that the MAX continues to be a strong competitor to rival Airbus’ A321neo and other versions of the A320 family of single-aisle planes.
The A321neo was built as a direct competitor to the largest and longest-range versions of the MAX. The full breadth of the A320 family of planes – now augmented by the smaller A220 – competes head-to-head against the full range of Boeing 737 family of planes. Since the grounding, Airbus has landed a huge percentage of sales the 120- to 220-seat narrow body segment. Though narrow body planes lack the enormous price tags, seating capacities and flight ranges of big widebody planes used mostly on international routes, they are the economic backbones for both Airbus and Boeing.
Historically, far more narrow bodies have been sold than wide bodies, especially to U.S. carriers. Big conventional airlines need hundreds of narrow body planes each to bring passengers from huge swaths of the nation to their hubs, where those traveling to foreign destinations can transfer to widebodies for long haul flights over oceans. Without all those narrow body “domestic” planes, there would be need for the grander, sexier wide bodies. Furthermore, with only a few exceptions, mold-breaking discount carriers stick with single-aisle planes because they typically target price-sensitive travelers flying within domestic or “near international” markets, where smaller capacity planes are ideal for meeting demand and doing so at relatively lower costs. As a result the 60-year-old 737 line of planes and the 33-year-old A320 line of planes are seen, respectively as Boeing’s and Airbus’s bread-and-butter products.
In Alaska’s case, between the 13 MAX 9s it will lease from Air Lease Corp., the 32 MAXs it has on order, and additional MAX planes it is almost certain to order in the near future, it will be able to once again become an all-Boeing operator in just a few years. It was an all-Boeing airline until it acquired Virgin America in 2016 and took on its fleet of A320s and A319s, plus the A321neos that Virgin America had on order at the time.
The process of replacing Aibus planes with Boeing MAX planes will begin late next year when Alaska will sell of its A320s to Air Lease Corp. and take delivery of 13 MAXs between the fourth quarter of 2021 and the end of 2020. The plan calls for Alaska then to lease those same A320s back into its fleet on a short-term basis until enough additional MAXs become available for those 10 Airbuses to leave Alaska’s fleet permanently. This new deal, along with Alaska’s decision to park permanently all of its A319s and some of its A320s this summer, will leave the airline with just 39 A320 and 10 A321neos in its fleet after 2022, and those planes will be phased out thereafter as more MAX planes joins the fleet.
Airbus officials see the current demand environment, which has been greatly disrupted by the Covid-19 pandemic, as an opportunity for it, as something of a niche competitor, to expand its reach into new and existing markets by offering more seats to leisure travelers. Because of the fear of coronavirus and companies’ aversion to the physical and financial risk related to putting their employees on the road, business travel demand has plummeted by 80% over from what it was pre-pandemic. But Alaska, like a number of other smaller airlines, view the situation as an opportunity to use their nimbleness that stems from not having complex international route networks and fleets to shift quickly to aim more at leisure travel markets. The 13 MAXs Alaska is leasing from Air Lease Corp., the 32 it already has ordered from Boeing, and additional MAXs it is likely to order in the near future will allow it grow in those markets with its preferred aircraft type.
The deal shows just how intense the A320/321neo vs. 737 Max (which comes in four versions) will be over the balance of the decade. Both families of single aisle jets are being marketed as super-efficient types for future competition in large population markets like the domestic U.S. market, the intra-European market, China’s domestic market, the Southeast and Southern Asia markets, the domestic Australian market and the intra-South American market. Not only do both lines offer fuel cost efficiencies of 15% or more over their predecessor aircraft, the also tend to be larger than the earlier generations of A320 and 737 aircraft. That means they can carry even more passengers at lower fuel and operating costs.
The Alaska deal announced Monday also shows that Boeing very much remains as a strong Airbus competitor. Of course, that was always going to be case, assuming the MAX was ever approved to fly again, because neither manufacturer has enough capacity to meet 100% of global demand for such planes. In fact, both would struggle to meet even 60% of global demand for single aisle airliners, even at today’s Covid-19-depressed levels of demand. But plenty of investors and some travel industry analysts fretted prior to the un-grounding of the MAX planes that Boeing might be forever compromised as a maker of single aisle planes, or even as a maker of widebodies, too.
To be sure, Boeing faces enormous financial and engineering challenges ahead. No only must it find a way to recover from the billions of dollars in sales it lost during the grounding – and likely will continue losing while it gears back up during a time of pandemic and dramatically reduced travel demand. It also must win back the trust of airlines, some of which switched orders and their allegiance to Airbus during the grounding period.
Boeing also is likely to begin work at some point in the next few years on its next generation of narrow body jets to begin the natural process of replacing the MAX generation of jets. That design effort promises to be both difficult and expensive because the base 737 design, which dates back to the mid-1960s, probably has been stretched and altered about as much as it can be. Thus, its eventual replacement is likely to be an entirely new design that will need to incorporate potentially radical new design concepts, materials and process, all of which will increase the cost, time and risk involved in bringing such a plane to market. Whether Airbus will need to match that move to remain competitive in the decades ahead, or if it can further modify the younger A320 design to continue competing without as large a future investment is not yet clear.
But clearly, in the short term Alaska’s decision to jump back on the MAX bandwagon so quickly after the FAA gave the plane its wings again will give other airlines around the world the public relations and investor relations cover they may need to begin ordering MAXs again.
That does not mean necessarily that Airbus will see its orders for A320 family planes slack off as some carriers begin ordering Boeing planes again. It does, however, point to continued and likely long-term marketing battles between the world’s two big aircraft makers. And, assuming no further major design problems or groundings impact either company, it likely also will serve as a huge roadblock to any future successes for China’s COMAC and Russia’s United Aircraft Corporation.
Both state-controlled companies have struggled for decades to develop single aisle airliners that can compete with Boeing and Airbus products in terms of mechanical quality, comfort and, especially, operating economics. Now the two companies are working together on the CRAIC CR929, a joint venture widebody plane that could seat between 250 and 320 passengers and that the two companies hope will be ready to enter service by 2029.
Both COMAC and UAC say their planned widebody is aimed at breaking up the Airbus-Boeing duopoly. But without much success at selling their respective single aisle aircraft, it’s not clear how the two companies could afford – short of massive government investment that would run afoul of international competition rules – to create the kind of cutting-edge widebody they would need to make a serious impact in that market. Nor is it clear how they will be able to convince airlines around the world to gamble on their planned new widebody plane when their track record in the production of narrow body jetliners has been poor.