At first glance, WestJet's new aircraft order for 65 Boeing 737 Max narrowbodies could be viewed as a predictable move to upgrade the carrier's mainline fleet, which is already comprised of entirely 737 aircraft. But a closer look at the deal shows that it provides 17-year-old WestJet with the opportunity to greater tailor its fleet to capacity needs in the long-term, which has been a main focus of airline management for several quarters and a key to managing maturing costs.
FLEXING THE FLEET
The pending 65-aircraft deal for the new Max aircraft is comprised of 40 737 Max 8 and 25 Max 7 aircraft, with deliveries starting in 2017. The deal includes a further option to substitute those orders for the Max 9 model, which could be delivered over the course of a decade from 2017 to 2027.
The Max order will allow WestJet to further increase the flexibility and efficiency that its executives have underscored for several months, says Walter Spracklin, a Toronto-based senior analyst for RBC Dominion Securities.
"They executed here on a deal that provided them significant more flexibility than they had yesterday," says Spracklin.
Looking more closely at the pending order shows that it builds in the flexibility to upgrade WestJet's existing commitments to the new, more efficient Max models as well.
While the Max order is for 65 aircraft, WestJet would receive only 50 more aircraft than it had previously committed to with Boeing before this announcement, for a total of 92 commitments for the 737. That is because WestJet has opted to substitute orders for 15 next-generation aircraft with the new Max model. This will allow WestJet to receive the benefits of the new type such as improved winglets, less fuel burn and improved maintenance costs.
By changing these 15 Next-Generation 737 orders to Max models, WestJet will be receiving at least some of those aircraft later than originally planned. These aircraft are scheduled for delivery between December 2014 and 2018, however the specific sub-types that will be substituted with the Max models is unclear.
Without taking account of this new, pending order, WestJet is expecting to receive one 737-700 and seven 737-800 aircraft in 2014, five 737-700s and five -800s in 2015, and 19 more 737-700s in 2016 and 2017.
Even before the Max deal, WestJet had the flexibility of converting any of those -700 orders to the -800 model. In May, the carrier announced that it did just that with an order for 10 737-800s and deferrals of five 737-700s scheduled for delivery between 2014 and 2015 to 2016 and 2017. At that time WestJet also revealed that it would sell 10 737-700s to Southwest Airlines, with deliveries split between 2014 and 2015.
The new Max order allows WestJet to widen the range of aircraft it will commit to from Boeing within the next decade, giving it the option to either add a few more 737s within the decade or expand the fleet with significantly more aircraft than the 103 737s it flew at the end of the second quarter.
Not counting the pending Max order, WestJet has planned to operate as few as 102 or as many as 135 737s by 2018, with 33 leases available for renewal during the period. When adding in the new order and looking out through 2023, it now says it could have as many as 162 or as few as 120 aircraft. The airline operated 44 leased 737s at the end of the second quarter, regulatory filings show.
WestJet's timeline for receiving the new Max aircraft has not been disclosed yet beyond the detail that it would start receiving the Max deliveries in 2017 and would have Max 9 options available from 2017 to 2027. The carrier's current deliveries extend through 2018. The transaction is expected to close before the end of September.
In some ways, WestJet's long-term approach to managing the fleet is similar to that of Memphis-based FedEx, which been able to modify its purchase agreements with Boeing to take on more Boeing 767-300s and defer and convert orders of the 777 freighter to better match the demand of the weaker-than-expected cargo market over the last year. While the two carriers serve vastly different markets and have respective reasons for choosing this flexible approach, both have crafted long-term agreements that allow the ability to tailor capacity to demand.
Although WestJet will be receiving some of its aircraft later than planned with the new agreement to substitute the next-generation 737 orders for the Max, the deal is "agnostic on future capacity" says Spracklin. After all, the carrier can execute renewals on any of the 33 lease returns until 2018 and will still continue to receive next-generation 737 aircraft for the next several years.
WestJet expects system-wide capacity to grow between 11% and 12% in the third quarter, and between 7.5% and 8.5% for the full year of 2013. In 2014, capacity will grow at a lower range of 4% to 6%.
WestJet's new regional carrier, Encore, also plays a role in how WestJet will choose to tailor capacity in the future. The new Calgary-based airline, which launched in June with two Bombardier Dash 8 Q400 aircraft, will take on some 737 routes and frequencies when it is more efficient to fly the smaller regional aircraft.
Encore had received two of the turboprops at the end of the second quarter and has commitments for another 18 aircraft by 2015, along with 25 additional options. When counting the turboprops, WestJet could have as few as 20 turboprops by 2015, or as many as 45.
WestJet's fleet of 103 Boeing 737s and two Q400s averages 6.8 years.
As WestJet plans for the future and encounters maturing costs, it is in the midst of implementing a cost-savings plan to find more efficiencies. Earlier this year, the carrier set out to reduce annual costs by Canadian dollar (C$) $100 million ($94.8 million) by the end of 2015. It is expecting to see $50 to $75 million in savings in 2014.
The new Max aircraft are outfitted with CFM International Leap-1B engines that are designed to provide a 13% reduction in fuel burn and emissions than current single-aisle aircraft, as well as new winglets, which could provide additional savings from reduced drag and better performance. The Max is also designed to need 6% to 7% less airframe maintenance than the next-generation models, says Boeing.