Why Alaska Airlines can’t retire its Airbus A320s all at once
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The word from Alaska Airlines headquarters is that they want out of the Airbus A320.
The airline industry has contracted dramatically during the coronavirus pandemic. Every carrier is focused on cutting costs — including furloughing employees at some — and streamlining where they can to survive. As part of that effort, airlines have shed hundreds of jets, from the Boeing 757s and 767s at American Airlines to the McDonnell Douglas MD-88s and MD-90s at Delta Air Lines.
Analysts at Cowen estimate that U.S. airlines will need to remove as many as 1,000 planes by the time the pandemic and its fallout pass. Every airline faces cuts, with Seattle-based Alaska estimated to need to remove around 43 mainline planes.
What makes Alaska different is executives say they want out of the 61 A319s and A320s that the airline inherited from Virgin America. But so far in the crisis, it has only retired 12 of those planes — all 10 of its A319s plus two A320s — and outlined plans to remove just 17 more in the future.
“We do have an appetite to incrementally get out of the A320s and get into a better profit-producing aircraft,” Alaska chief financial officer Shane Tackett said at a Cowen conference in September. His comments echoed those the airline’s leadership has repeated since January, when the focus was on finding the right replacement rather than simply getting out of the planes.
What then is keeping the remaining 49 A320s in Alaska’s fleet flying? Most indicators point to one thing: leases.
A leased fleet from Virgin America
When Alaska bought Virgin America for the large sum of $2.4 billion in 2016, it gained an attractive map of high-profile transcontinental routes from the country’s largest cities and highly sought-after gates at the constrained Los Angeles (LAX) and San Francisco (SFO) airports. It also effectively blocked competitor JetBlue Airways from gaining a stronger foothold on the West Coast.
One downside of the deal was Virgin America’s 63 mostly-leased Airbus jets. Alaska found itself with a mixed fleet of A320 family and Boeing 737 jets — the latter it mostly owned — after years of touting itself as “Proudly All Boeing.”
Today, Alaska flies 166 737s, the 49 A320s plus 10 A321neos. The A320s are split between 40 leased and nine owned, according to data from the Cirium Fleets Analyzer.
The way to think of owning versus leasing an aircraft is similar to owning or renting a home. An airline can do pretty much whatever it wants if it owns a plane, including flying it for as long as it sees fit. On the other hand, there are limits on what it can and cannot do, and a set term for how long it will fly the aircraft when it leases a plane. Breaking a lease early can result in steep financial penalties — like what a renter might face for breaking a contract on an apartment lease.
Alaska is weighing that final point — breaking the lease early — with its A320s. While it can retire the planes it owns at anytime, the leases on the remaining jets expire over the next few years — through 2025, Fleets Analyzer shows. The majority return in 2023 when leases for 15 jets expire.
Over the summer, Alaska tried to reach agreements with the lessors of its A320s, according to a recent story by AirFinance Journal. Citing industry sources, a request by the airline for proposals to replace the Airbus planes with 737s was rebuffed by leasing companies.
“They may keep those aircraft to scheduled redelivery dates,” one unnamed lessor said — leasing-speak meaning that Alaska appears unlikely to return those aircraft early.
Returning Alaska’s A320s early about dollars and cents
“It’s clear-cut that the A320 is not great for them,” Raymond James analyst Savanthi Syth told TPG, recounting a meeting with Alaska management in August. She said executives described the plane as the “the least efficient aircraft in their fleet” at the time.
What she sees is a struggle between the airline and the leasing companies who own the jets. The lessors have their own bills to pay and, if Alaska returns the A320s early, they need to find someone else to fly them. Placing jets with airlines has become more challenging during the pandemic, she said.
“There’s just no where else for lessors to put those aircraft if they take them from Alaska and they’ve got their costs to cover,” Syth said. Ultimately, Alaska’s decision will come down to the cost of continuing to fly the A320s versus the penalties for returning them early.
The same dollars-and-cents calculus is on display in other carriers’ retirement decisions. For example, Delta Air Lines unveiled recently that it will remove its 91 Boeing 717s over the next five years, or by 2025. That decision is widely understood to be a balance between minimizing early lease return penalties and a desire to have enough replacement Airbus A220s.
JetBlue Airways is believed to be weighing similar factors for its Embraer E190 fleet. Prior to the pandemic, the jets were due to be replaced with A220s — its first arrives in December — by 2025, but the airline may be looking at options to move up that date.
Alaska, for its part, is unlikely to return to its “Proudly All Boeing” fleet once the A320s are gone. The airline has given no indication that it wants to remove its A321neos, planes whose leases it also inherited from Virgin America.
“They really do love the A321neo,” Syth said of her meetings with Alaska’s leadership team.
And with pandemic flying cuts, Alaska really does not need the A320s. Removing the 49 aircraft represents only about 15% of its combined mainline and regional fleet at the end of June. This is far less than the planned year-over-year reduction of more than 40% in the carrier’s November schedule.
The carrier had 29 A320s in storage as of Oct. 16, Fleets Analyzer shows. The decision to keep any of the jets flying is likely driven by the need to keep pilots on the type flying. Moving pilots to Boeing aircraft — something it had begun in small numbers before COVID — requires extensive training.
Still, Alaska’s fleet plan appears oriented towards Boeing in the future. The airline holds firm orders for 32 737 MAX jets plus options to take up to another 37. It was already engaged in talks with Boeing over more MAXes — as well as with Airbus over additional A321neos — before the pandemic.
Earlier in October, Reuters reported that Alaska is nearing a deal for more MAXes once the Federal Aviation Administration re-certifies the grounded jet. FAA sign off is expected before the end of the year.
Featured image by AaronP/Bauer-Griffin/GC Images.
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