Allegiant Air buys 50 new Boeing 737 MAX jets in strategy shift

© Reuters. FILE PHOTO: The first Boeing 737 MAX 7 is unveiled in Renton, Washington, U.S. February 5, 2018. REUTERS/Jason Redmond

By Eric M. Johnson and Rajesh Kumar Singh

SEATTLE (Reuters) -U.S. low-cost carrier Allegiant Air confirmed plans on Wednesday to buy 50 new Boeing (NYSE:BA) 737 MAX jets worth $5.5 billion at list prices in a switch of supplier and strategy as it gears up for a post-pandemic rebound in tourism.

The order marks what one analyst, reacting to purchase plans first reported by Reuters https://www.reuters.com/business/aerospace-defense/exclusive-us-carrier-allegiant-air-buy-50-boeing-737-max-jets-sources-2022-01-04 on Tuesday, called a stark change of approach by the fast-growing domestic carrier, which had previously relied mainly on used Airbus aircraft.

Allegiant "has experienced one of the strongest recoveries of U.S. airlines," Jefferies analyst Sheila Kahyaoglu wrote, adding that the order is evidence of post-pandemic confidence in leisure travel "vastly outperforming corporate travel."

The Las Vegas-based carrier will buy 30 737 MAX 7 aircraft and 20 737 MAX 8-200 aircraft, making it the launch customer for that larger variant in the United States, Chief Financial Officer Greg Anderson told Reuters.

It will take delivery of 10 of the jets in 2023, 24 in 2024, and 16 in 2025, he added in an interview on Wednesday.

The deal is a boost for Boeing Co after two key medium-haul customers, Qantas and several affiliates of Air France-KLM, switched to Airbus in December.

"With this deal, and these new MAX aircraft, it will provide the ability to grow into 400 more routes," Anderson said.

He declined to name city pairs targeted under the expansion but said the planes would add seating capacity and 20% fuel savings compared to Allegiant's older Airbus aircraft.

Boeing's shares were up 1.3% in midday trade while the stock of airline parent Allegiant Travel Co fell more than 8%.

Colin Scarola, vice president at CFRA Research, reckons that the Boeing order could undermine Allegiant's cost advantage as differential and mixed fleet tends to result in "significant" operating costs.

Scarola said the order also suggests that market inventory might be depleted for the much-cheaper highly used planes the low-cost airline typically likes to buy.

MIXED FLEET

Allegiant has until now relied mainly on cheaper second-hand planes to reduce costs - a strategy that allows it to use jets less intensively and attack thinly populated routes, with some planes flying no more than twice a week, according to Jefferies.

Raymond James analysts said this approach is well suited for what is expected to be a "choppy recovery" but warned of the operational inefficiencies caused by having a mixed fleet.

Allegiant currently operates 110 Airbus A319s and A320s and will continue buying A320s in the used market, Anderson said. It has some 50 aircraft – 20 A320s and 30 A319s - that it may need to retire over the coming decade.

Analysts said the deal for new jets pointed to an aggressive offer from Boeing while experts have said Airbus remains hampered by high parts costs for the A220, another type examined by Allegiant. Boeing has denied slashing prices to win deals.

Wednesday's expansion is the latest sign of growth among "ultra-low-cost" carriers that combine rock-bottom fares with optional charges. Such carriers are expected to emerge in a position of relative strength from the COVID-19 pandemic.

"Our bookings are greater than they were in 2019," Anderson said, referring to pre-pandemic travel levels.

Still, like many airlines, Allegiant has voiced uncertainties over fuel prices, labor and supply chain problems as well as mounting inflationary pressures.

Mexico's Viva Aerobus in December announced a commercial alliance with Allegiant to offer flights between the United States and Mexico.