There is good news and bad news in Allegiant Air’s selection of the Airbus A319 for Airbus.
On the positive side, Allegiant becomes a new Airbus customer using the A319 in an ultra- low cost business model, which is positive. Airbus CEO Barry Eccleston stated that “Allegiant is hyper conscious of both cost and comfort, and the fact that they are turning to the A320 family proves that we have the aircraft the airline knows it needs to fly them successfully into the future.”
But on the negative side, Allegiant’s President Andrew Levy noted “A319 asset values have significantly declined, and now mirror the environment we saw when we first began buying MD-80s.” Does that mean that the A319ceo is next on the list of aircraft headed for desert storage, with low residual values required to make operating economics work? Allegiant has traditionally been a “bottom feeder” that purchases used aircraft at low prices.
Allegiant listened to pitches from OEMs for new aircraft, and after examining low lease rates in the used market and a comprehensive economic analysis concluded that buying new aircraft simply didn’t make economic sense with lease rates so low for the A319.
Allegiant cited current market conditions as driving their decision, as the quest for lower seat-mile economics have driven many A319 and 737-700 operators to A320 and 737-800 and as a result created an oversupply in the smaller aircraft market. Combined with the new Bombardier CSeries looming as with substantially better economics than even the new A319neo and 737-7Max re-engined versions now for sale, values should fall even further as demand for the older models wanes.
Will this provide Allegiant an opportunity to move upward, with used A320 or A321 models for larger markets? Airbus commonality has always been attractive to operators within the A320 family. Time will tell if further seat growth will be necessary as new aircraft enter the market with better seat-mile economics. But today, the used A319, at today’s low lease rates, offers a significant economic improvement over the MD-80, which has reached the end of its economic life.
A318 and 737-600 have already reached the end of their economic lives. Will A319 and 737-700 soon follow as they are replaced by neo and Max? The true answer lies in residual values, which we expect to fall to the point of economic equilibrium. By this we mean, for example, that a used A319 will have substantially higher operating costs than a new CS300, and to make up that difference the A319 will be priced lower.
Those holding A319 and 737-700 models will soon need to recognize that the market values for these airplanes are in flux. While the A319 has been the first to be hit, the 737-700 won’t be far behind.
