WestJet entered into a LoI to purchase 65 737 MAXs, consisting of 40 737 MAX 8s and 25 737 MAX 7s. The pending order, valued at $6.3bn at current list prices, is a key component of the Calgary-based carrier’s strategy to optimize and modernize its fleet.
This news demonstrates the switching barrier is for an airline. As we have seen, very few airlines have moved from one single aisle offer to the other. While its true WestJet has been a loyal Boeing customer since it started, one has to wonder what would Airbus (or Bombardier for that matter) could have done price wise to make a switch worthwhile? Switching costs are cited by OEMs as a factor. But airlines say that given enough airplanes (as few as 20 we hear), switching costs are bearable. For example, switching costs for American’s huge Airbus order were irrelevant.
WestJet’s selection of the MAX is understandable in terms of fleet commonality and minimal disruption. Take a look at this chart from the airline.
Its fleet growth plan is deliberate – by this year end it should have 105 airplanes and by end 1028 it should have 135 (+28%). The MAXs have delivery scheduled to begin in September 2017 and the chart does not reflect these. We expect the airline’s older 737s to be sold and replaced by MAXs.
The fleet news reports that WestJet will substitute 15 of its existing Boeing NG orders currently scheduled to deliver between December 2014 and 2018, with Boeing 737 MAX aircraft, for a net increase of 50 committed deliveries to its fleet plan. Including this pending order, WestJet’s future 737 deliveries total 92, with commitments for the proposed MAX 7 and MAX 8 aircraft (including substitution rights to MAX 9) scheduled for delivery from 2017 through 2027. WestJet notes that as a result of the flexibility built into its fleet plan, which includes its lease renewal options but excludes any potential sales other than the previously announced sale of 10 737 NGs in 2014 and 2015, the fleet could be as large as 162 aircraft or as few as 120 aircraft a decade from now. This means that based off 2013 year end, the fleet could grow by 14% or 54%.
It is interesting to see the MAX 7 included in this order – WestJet is only the second airline after Southwest to express interest in the smallest MAX. However note the substitution clause – if traffic warrants it, we think the airline might convert to MAX 8. That way it can increase its capacity without growing the fleet. Of course a MAX 7 deposit is lower and provides a useful delivery slot which can be changed later on. Moreover the MAX 8 likely offers more attractive economics. Clearly if even the MAX 9 is under consideration, WestJet is looking at up-gauges.