Allegiant Airlines punished for adding Boeing to fleet

Bloomberg

Allegiant Airlines tumbled the most in 18 months after the carrier reversed its strategy of keeping costs in check by flying only Airbus SE planes, ordering 50 Boeing Co. 737 Max jets.
Under the deal, which has a total value approaching $2.5 billion, the airline will buy two versions of the Max to be delivered from 2023 through 2025, Allegiant Travel Co said. The carrier has options to purchase an additional 50 aircraft.
“The operating economics are terrific,” Allegiant Chief Financial Officer Greg Anderson said in an interview. “When we see the numbers, it makes a lot of sense. We drove a heck of a deal.” Allegiant has previously relied mostly on used or leased aircraft.
Investors appeared anxious about the purchase, sending Allegiant’s shares down 8.8% to $176.12, logging the biggest drop since June 2020. Low costs are essential to support the airline’s model of offering heavily discounted, bare-bones fares while charging for items such as coffee and bottled water. Boeing and American depositary receipts of Airbus were little changed.
Allegiant is taking 20 Max 737-8-200 models and 30 of the smaller Max 737-7. The Max 8 has a base value of $51 million, according to Avitas. The aircraft appraiser doesn’t offer a going price for the Max 7, which hasn’t yet entered commercial service.
For Boeing, the purchase takes some of the sting out of December losses, when long-time customers Qantas Airways Ltd. and Air France-KLM selected Airbus jets over the Max for their narrow-body fleets. Boeing has won large orders from US airlines as it works to re-establish the Max as a reliable workhorse following two fatal crashes and groundings of more than two years in some countries.
Covering the cost of new planes typically means keeping them in the air as much as possible. That could threaten Allegiant’s practice of varying its flight schedule daily for demand, Savanthi Syth, a Raymond James Financial Inc. analyst, said in a note ahead of the order announcement.
Adding a second fleet type also increases expenses for crew training and parts inventory.
“I’m not surprised that they went with new equipment but I’m shocked they ended up with a different type,” said Andrew Levy, a former Allegiant president who now leads startup Avelo Airlines. “It’s really incredibly hard to manage a second type, and I just really don’t understand why they would want to take it on.”
Allegiant’s Anderson said the airline is banking on the jets’ favorable price, which he didn’t specify, as well as a 12-year maintenance agreement with engine provider CFM International Inc., to help lower operating costs. The Max will have more seats per plane and reduce fuel consumption by 20% compared with the airline’s oldest Airbus planes.
The carrier will need to increase its pilot corps about 5%. Allegiant expects to continue enlarging its fleet by 10% annually and will need as many 150 planes over the next six years.
The airline considered Airbus offerings, including the A320neo and A220, as well as purchasing used planes, Anderson said.