Returns as of 10/09/2021
Returns as of 10/09/2021
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Long-troubled Italian flag carrier Alitalia will shut down for good at the end of next week, after plunging into bankruptcy (again) in 2017. At that time, the Italian government will launch a new successor airline called Italia Trasporto Aereo.
ITA will start operations with 52 Airbus (OTC:EADSY) aircraft it is taking over from Alitalia. But it plans to replace many of those planes with new jets while also doubling its fleet size by the end of 2025. Last week, ITA picked Airbus as its sole new aircraft supplier in another blow to Boeing‘s (NYSE:BA) turnaround effort.
In recent months, airline industry experts have generally believed that Airbus had the inside track for winning ITA’s business. Since the carrier plans to launch service with Airbus jets inherited from Alitalia, ordering new aircraft from Boeing would force the airline to endure a costly and potentially disruptive fleet transition.
Nevertheless, ITA continued to negotiate with Boeing, too. Some industry sources believed that Boeing might offer discounts too good to pass up in an effort to start rebuilding its market share.
Ultimately, Airbus won the competition. Last week, ITA announced a memorandum of understanding with Airbus to buy 28 aircraft — 10 A330neos, seven A220s, and 11 jets in the A320neo family — with deliveries beginning in early 2022. Meanwhile, Air Lease announced a lease deal with ITA for 15 A220s, 11 in the A320neo family, and five A330neos, all from its existing order book. Those deliveries will begin in the second half of 2022 and run through early 2025.
A rendering of an Airbus A330-900neo. Image source: Airbus.
ITA also plans to lease Airbus aircraft from other sources. While the airline didn’t provide full details, it appears that it will lease 25 additional planes (excluding the 31 aircraft coming from Air Lease) over the next several years, including the A350-900. That means it will eventually operate aircraft from all four of Airbus’ current aircraft programs.
Winning ITA’s business is particularly good news for Airbus because it will help build the order backlogs for the A220 and A330neo families.
The Airbus A220 has won accolades for its range, low fuel burn, and comfort. Nevertheless, Airbus ended August with just 470 outstanding firm orders for the type. That isn’t much considering Airbus’ ambition to build as many as 14 A220s per month by 2025. Moreover, leasing companies have ordered 139 A220s, but so far they have taken delivery of a mere eight.
Winning at least 22 more orders for near-term delivery (including lease placements) will help Airbus start to ramp up A220 production, even if its goal of building 14 per month seems out of reach for now.
A rendering of Airbus A220s. Image source: Airbus.
The A330neo program faces even greater challenges due to weak demand throughout the wide-body market. Airbus is currently building just two A330neos per month, so getting 15 orders (again including lease placements) represents a major victory, as it will help Airbus sustain production until demand recovers.
By contrast, ITA’s decision to adopt an all-Airbus fleet represents another missed opportunity for Boeing. While it has received more commercial jet orders than Airbus this year, its backlog remains significantly smaller than that of its European rival.
Furthermore, just two key customers, Southwest Airlines and United Airlines, have accounted for the bulk of Boeing’s year-to-date orders. That’s problematic because big customers like those tend to negotiate bigger discounts on aircraft purchases.
Winning ITA’s business would have provided some much-needed diversification for Boeing. Now, the U.S. aircraft manufacturer probably needs to get more aggressive to ensure it wins upcoming fleet renewal competitions for two of Europe’s big airline groups: Air France-KLM and International Consolidated Airlines Group.
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Stock Advisor launched in February of 2002. Returns as of 10/09/2021.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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