is acquiring up to 13 MD-80 series aircraft from Scandinavian Airlines System (SAS) for delivery from now until February 2013, but does not plan to put any of the aircraft into service, at least not for a while.
“We don’t view the purchase as a fleet growth; the transaction for us is all about the engines,” a spokesman for the Las Vegas-based low-cost carrier says. “The planes will go to the desert.”
It is possible the airline will use the airframes one day, he adds, or their parts could be used to support the existing fleet, “but that’s not driving the transaction for us.”
Under the agreement, Allegiant affiliate Sunrise Asset Management will pay $20 million for up to 13 MD-82, -83 and -87 aircraft (and their 26 engines) and 12 spare JT8D-219s, SAS says. For the Scandinavian carrier, the transaction is part of its plan to phase out its MD-80 series aircraft, which are being replaced byand until the airline begins receiving its Airbus A320NEOs in 2016.
For Allegiant, the newly acquired assets will be used primarily to replace engines that will be coming due for major overhauls over the next two years.
It is a bit unusual in that, beginning in late 2010, Allegiant changed its MD-80 engine maintenance strategy, which had been to reduce the number of engine overhauls it did by buying replacement engines from the secondary market instead.
That kept its engine maintenance cost per aircraft low—about $9,000 per month per aircraft in 2010, for example—but at the price of operating with older engines with reduced reliability. The in-flight shutdown rate remained at industry averages, Allegiant executives say, but more aircraft had to be taken out of service because the temperatures of the older, less efficient engines were more apt to creep up too high, particularly in the peak-demand, hot summer months for operations in Las Vegas, Phoenix and Florida (all big parts of Allegiant’s network).
To fix that problem, Allegiant decided in late 2010 to perform more overhauls of existing engines instead, taking a short-term hit on costs for the benefit of better reliability. The airline, which operates just over 50 MD-80s, is spending $20 million to $25 million to overhaul up to 35 engines. The overhauls started in 2011 and should be completed by the first half of next year.
At that point, more than half of the airline’s engines will be operating with fewer than 1,000 cycles since their last overhaul, compared to just 11% in January 2011. The engines should be good for 4,000 to 5,000 cycles, says Kris Bauer, senior vice president for operations.
The overhaul program is temporarily driving up the engine maintenance cost per aircraft to about $33,000 per month this year, but that should drop to about $14,000 next year, Allegiant says.
The shift in strategy, however, does not mean Allegiant is pulling out of the secondary engine market. Scott Sheldon, Allegiant’s CFO, says the airline will both acquire and overhaul powerplants. Allegiant is counting the SAS deal as part of $25 million it says it expects to spend on engine purchases through the second quarter of 2012, and Sheldon says Allegiant also recently signed a deal to acquire 10 engines from.
“In 2011 it made more sense to recondition existing engines more often than it had previously, but that shouldn’t be viewed as a complete change in strategy,” an Allegiant spokesman says of the SAS deal. “We never stopped shopping the market for used engine deals. This particular deal is a great opportunity to get quality used engines at a great price, so we did it.”