The King of Used Aircraft Buys Some New Planes

By Markets Fool.com

In the past year, shares of Boeing (NYSE: BA) and Airbus (NASDAQOTH: EADSY) have been dragged down by the news that several major airlines are deferring aircraft orders. In some cases, airlines are taking advantage of the low fuel price environment to buy used planes -- or extending the lives of planes they already own -- rather than purchasing new ones.

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However, airlines aren't universally moving toward older planes. In fact, Allegiant Travel (NASDAQ: ALGT), which has exclusively purchased used aircraft in the past, ordered 12 new A320 aircraft from Airbus late last month. This suggests that investors may be overestimating the danger that Boeing and Airbus will be decimated by order cancellations.

Prominent airlines defer orders

Just in the past couple of months, two of the largest airlines in the world have announced order deferrals, delaying the delivery of some airplanes. In June, Southwest Airlines pushed back the scheduled delivery dates of 67 Boeing 737 MAX 8s by an average of four years.

Southwest recently deferred some 737 deliveries. Image source: The Motley Fool.

Then, in July, American Airlines deferred the delivery of all 22 Airbus A350 jets it has ordered. This was the second time since 2015 that it deferred A350 orders. The first A350 delivery was pushed back from the spring of 2017 to late 2018, with an average deferral period of 26 months.

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Neither of these order deferrals was particularly significant by itself. In fact, Boeing continues to report that deferrals or cancellations have been few and far between.

However, some analysts worry that if U.S. airlines -- which are the most profitable in the world -- are deferring aircraft orders, it's only a matter of time before foreign airlines do the same. But they may be blowing things out of proportion.

Allegiant goes the other way

Over the past 15 years, Allegiant Travel has pioneered an ultra-low-cost business model using used aircraft. Allegiant first became successful by purchasing aging, out-of-favor MD-80s at rock-bottom prices from airlines that were desperate to get rid of them.

Those MD-80s remain the backbone of Allegiant's fleet, but they are more than 26 years old on average. Thus, they are ripe for retirement. More recently, Allegiant has started buying used mid-aged Airbus A319s and A320s as the prices of those planes on the used aircraft market have fallen.

Allegiant is getting ready to retire its MD-80s. Image source: Wikimedia Commons user Aldo Bidini.

However, Allegiant moved into new territory late last month by ordering brand-new aircraft from Airbus. Allegiant probably got very favorable discounts by taking end-of-line A320s as Airbus transitions production to the new A320neo. Yet Airbus can afford to offer these discounts due to its efficient, high-volume production system for the A320.

Adding these new A320s over the next two years will allow Allegiant to meet its goal of retiring the MD-80 fleet by the end of 2019. Transitioning back to a single fleet type will simplify operations and help reduce Allegiant's costs. Additionally, the superior fuel efficiency, longer useful life, lower maintenance costs, and extra seating capacity of the new A320s will make these planes cost competitive with used A320s for Allegiant.

To be sure, Allegiant will continue to buy plenty of used A319s and A320s to meet the bulk of its fleet requirements. But its decision to deviate from such a long-standing strategy indicates the value of having new airplanes.

Don't fear the cycle

For certain aircraft programs, Airbus and Boeing are struggling to get enough orders. But for the higher-profile 737, 787, A320, and A350 programs, demand remains solid. While some airlines are deferring orders -- sometimes in favor of buying used planes -- other airlines are looking to buy more or to accelerate their delivery schedules.

Even Allegiant Travel, the king of used aircraft, is now dipping its toe into the water by ordering some new planes. That's a sure sign that the economics of new airplanes remain as competitive as ever, compared to used ones.

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Adam Levine-Weinberg owns shares of Boeing and is long January 2017 $30 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.