A year and a half ago, Alaska Air (ALK +1.87%) was a minor customer for Boeing's (BA +1.62%) 737 MAX family, with just 32 firm orders. Since then, the West Coast-focused airline has dramatically expanded its 737 MAX order book as it made plans to modernize and simplify its fleet.
But until very recently, Alaska Airlines had ordered only one of the five Boeing 737 MAX models: the 737-9. However, last week, the company announced that it would restructure its order book to incorporate two other 737 MAX variants.
Setting big plans for the 737 MAX
Alaska Airlines has expanded its Boeing 737 MAX order book several times since late 2020. In November 2020, the airline struck a deal to sell the 10 unwanted Airbus A320s that it owned to Air Lease in exchange for leasing 13 new Boeing 737-9s. A month later, Alaska agreed to place a firm order for 23 additional 737-9s, and options for another 15.
These deals gave the No. 5 U.S. airline 68 firm orders for the 737-9 by the end of 2020, including lease orders, and options for a total of 52 more.
Image source: Alaska Airlines.
During 2021, Alaska Airlines exercised 25 of its options for deliveries in 2023 and 2024. That gave it firm orders for 93 737-9s to be delivered between 2021 and 2024. Alaska also replenished its options in August. It now has options for 52 additional 737 MAX deliveries through 2026.
Alaska tweaks its orders
Over the past decade, the Boeing 737-900ER has accounted for the vast majority of Alaska Airlines' mainline jet deliveries. As such, it was natural that the carrier would choose the 737-9 -- the 737-900ER's direct successor -- for its initial 737 MAX orders. However, the airline's decision to exclusively order the 737-9 was more surprising: Alaska operates three different variants of the Boeing 737 NG.
On Wednesday, Alaska Airlines announced that it will add the 737-8 and 737-10 to its fleet plan. Whereas the airline configures its 737-9s with 178 seats, its 737-8s will be fitted with 162 seats, and its 737-10s will hold 189. The first 737-8 is now scheduled to arrive in the second half of 2023, and 737-10 deliveries will begin in early 2024.
Alaska Airlines expects a future fleet mix of approximately 15 737-8s, 70 737-9s, and 60 737-10s (for a total of 145 737 MAX jets), assuming it exercises all 52 of its 737 MAX options. The 737-10 will provide the airline with the lowest unit costs in its long-term fleet and will operate in high-demand markets.
The 737-9 will remain the airline's core aircraft for many large long-haul markets. Finally, Alaska Airlines will use the 737-8 on medium-demand routes and at airports with runways too short for the 737-9 or 737-10.
The big takeaways
Alaska's 737-10s will hold 6% more seats than its 737-9s, but will have only slightly higher operating costs. As a result, this order book update represents an important step toward reducing its unit costs to below their pre-pandemic levels.
NYSE: ALK
Key Data Points
Additionally, Alaska Airlines' press release strongly implied that the airline expects to exercise all 52 of its 737 MAX options. That makes sense, as Alaska doesn't have any firm orders beyond 2024 yet. To grow its fleet at a 4% to 5% annual pace, it would need about 25 deliveries in the 2025-2026 period. The carrier also has nearly two dozen older 737s that are likely due for retirement in the mid-2020s and hopes to exit its 10 Airbus A321neo leases early so that it can return to an all-Boeing 737 mainline fleet.
The recent oil price spike may be providing an extra impetus to Alaska Airlines' fleet renewal plans. The carrier's new 737 MAX fleet -- and especially the 737-9s and 737-10s -- will be dramatically more fuel efficient than the older-generation planes they replace.
If Alaska exercises all 52 of its options as planned, the 737 MAX will make up roughly half of its mainline jets by the end of 2026. That would give it a leg up over its biggest rivals, which will need considerably more time to upgrade their fleets to the latest and most fuel-efficient technology.
