Boeing Stock: Sun Country Airlines Not A Bright MAX Win (NYSE:BA)

For jet maker Boeing (BA) the past months have been extremely interesting. The airline saw negotiations with low-cost carrier Ryanair (RYAAY) stall but booked several repeat orders including big orders from United Airlines (UAL) for 258 Boeing 737 MAX aircraft and Southwest Airlines (LUV) for 147 Boeing 737 MAX aircraft. Boeing is still not a market darling and likely will not be for a long time and that might be a reason why big orders such as the ones recently from KLM and Transavia are portrayed as big losses for Boeing, while orders such as the one from Allegiant Air (ALGT) winning over an all-Airbus (OTCPK:EADSF) customer do not get the same attention. In one of my previous articles, I had a look at what elements played a role in the flipping of Allegiant Air.

With the order of Transavia in mind, I wondered whether there would be any direct effect on Sun Country Airlines (SNCY), which ideally would select the Boeing 737 MAX as the successor of the backbone of its fleet.

The link between Sun Country Airlines and Transavia

The first thing that is worth explaining is how and why I linked the fleets and fleet decisions of Sun Country Airlines and Transavia in the first place. Transavia operates in Europe and Sun Country Airlines operates in the USA. So, linking both is not straightforward. The reason why I thought about one airline’s fleet decision affecting the other airline is the fact that years ago Sun Country Airlines and Transavia would lease capacity to each other to cope with peak demand. However, it seems that such agreements do not exist at present.

One could say that with an outdated agreement in mind, looking at what fleet decisions could be made is not relevant and I would partially agree that the link between these two airlines is broken. However, the link with the market is not and so it’s still interesting to see what market forces and movements could be driving fleet decision for Sun Country Airlines.

An all-Boeing operator, but not a Boeing customer

What’s interesting to observe is that Sun Country Airlines has a fleet of 48 aircraft including 1 Boeing 737-700, 35 Boeing 737-800s and 12 converted freighter single aisle aircraft operated for Amazon Air, but a review of its order history with Boeing using the TAF Boeing Orders and Deliveries Monitor returns no records. It’s not the case that the airline never operated brand-new aircraft, but those were obtained via leases. Other aircraft that the airline operates are aircraft that are on their second lease term. It’s not to say that there exists no relation between Boeing and Sun Country Airlines, but not having ordered an aircraft directly from Boeing means that Sun Country Airlines does not have the strongest position for negotiations with Boeing like Ryanair, Southwest Airlines or United Airlines, for example, would have.

Knock-on effect of sales and market environment

Initially, when I still linked Transavia and Sun Country Airlines it was an interesting question to ask whether Sun Country Airlines would also head Airbus’ way or whether Boeing would try to secure a fast win with an order for around 50 Boeing 737 MAX aircraft with the airline. While there’s no link between Transavia and Sun Country Airlines anymore, that question remains somewhat relevant. Not so much to see whether Airbus would try to win over Sun Country Airlines, but whether Boeing would try to secure an order here and maybe throw in some additional discounts. One thing is certain and that’s for Boeing it makes more sense to give juicy discounts to flip an Airbus operator than to pull forward an order from a potential operator of the Boeing 737 MAX. For most airlines, the Boeing 737 MAX even with its troubled history is a very attractive aircraft to operate with around 15% lower fuel costs and lower maintenance costs.

What’s interesting at this stage is the capital cost of such a purchase and where Boeing wants to deploy the discounts to win orders. In some sense, Boeing and Airbus are not just each other’s competitors, but also compete with their own aircraft from the secondhand market and that’s where things are interesting for Sun Country Airlines. Admittedly, the nature of both markets is different but there is an overlap. In a balanced market, supply and demand are sufficiently balanced and the value of the aircraft remains somewhat stable at higher levels or in other words “the value retention is good.” That can give jet makers higher chances to compete with aircraft on the secondhand market, although lowering aircraft prices with secondhand aircraft as a reference is still not desired.

The current market, however, is one where airline fleets have shrunken. Some aircraft have been returned to their lessors earlier than anticipated while capacity requirements and thus redelivery of aircraft are not as high as in a pre-pandemic world and that sent the market values of secondhand aircraft down by tens of percent. So, aircraft orders or better said deliveries of new generation aircraft on stable fleet counts release previous generation aircraft to the market but the main contributor to lower market values is the lack of capacity requirements at this point and that makes it attractive for airlines to dip into the secondhand market instead of ordering brand new aircraft as there is a significant price differential.

The secondhand market for aircraft such as the Boeing 737 MAX is small, but the market for the Boeing 737-800 is one with opportunities and Boeing cannot match the prices in that market without significantly damaging its pricing power, whereas a Boeing 737 MAX 8 could sell for between $30 million and $50 million in the current market. A 4- to 12-year-old Boeing 737-800 could be selling for $12 million to $25 million. So, while we’re seeing opportunistic purchases for new next-generation aircraft it should also be pointed out that opportunities also exist on the secondhand market for previous generation aircraft at significantly lower capital costs and lease rates. That means that buying brand new aircraft in a depressed market might not always be the best deployment of capital.

Those opportunities also exist on the aircraft leasing market where Sun Country Airlines has dipped in the second-term aircraft lease market over the past 12 months with the lease of two Boeing 737-800s from CDB Aviation and successfully leased a set of young Boeing 737-800 aircraft. Brand-new aircraft offer maintenance costs benefit, but it should be noted that Sun Country Airlines has a rich history with operating aircraft on their second lease terms. So, the airline is familiar with the operational disadvantages and financial advantages of those leases, and currently, it seems that the advantages outweigh the disadvantages, also when compared to the possibility of buying brand new aircraft at higher capital costs.

Conclusion

Sun Country Airlines is an all-Boeing operator and Boeing could actually throw in a discount and easily post a headline order for the MAX. However, at this point for Boeing, it makes little sense to throw in significant discounts for an all-Boeing operator at the risk of hurting aircraft pricing over the longer term and instead those discounts could better be applied to flip an Airbus customer. That’s something we saw happening with Allegiant Air. There’s always a link between the pricing of used current generation aircraft and new next-generation aircraft, even though the market dynamics are vastly different. Currently, opportunities exist for airlines to leverage their knowledge of the economics of second-hand aircraft and Sun Country Airlines happens to be one of those airlines. While Boeing and Airbus fiercely compete, neither jet maker will be eager to hurt their pricing power on new aircraft to appeal to airlines that would normally opt for secondhand aircraft. It would be a race to the bottom on aircraft pricing power.

That does not mean that Boeing will not at some point get an order for the MAX directly or indirectly from Sun Country Airlines, but it will not push down the prices to pull that order forward. The jet maker will be more eager to wait for market prices to recover and then pitch the aircraft to the airline. Simultaneously, Sun Country Airlines can always assess the market opportunities on the secondhand aircraft market against ordering new aircraft and right now that advantage is with secondhand aircraft and the airline can continuously assess that situation and once it determines it is more beneficial to operate new aircraft, such as the Boeing 737 MAX, it can make an order or lease decision and until then the airline can grow with a relatively low-cost footprint. So, what we are seeing is that both Boeing and Sun Country Airlines have a very disciplined approach toward the business of buying and selling aircraft. When the time is ripe, the Boeing 737 MAX might become the subject of negotiations.