Air Canada places a US$6.5 billion order for 61 Boeing narrowbody aircraft

MONTREAL – Air Canada is switching its narrowbody fleet to Boeing, announcing Wednesday that it will purchase 61 of the U.S. manufacturer’s newest narrowbody aircraft over the next decade in a deal with a face value of about US$6.5 billion.

The country’s largest carrier said it could expand the order to as many as 109 of Boeing’s 737 MAX planes as it replaces 87 older Airbus and up to 45 Embraer aircraft.

The order includes two sizes of Boeing 737 MAX aircraft with between 162 and 180 seats in two seating classes. It can also substitute for some 737 MAX planes containing 126 seats.

Besides the 61 firm orders, Air Canada (TSX:AC.B) has options for 18 planes and rights to purchase an additional 30 aircraft. The firm order is valued at US$6.5 billion at list prices, although airlines typically receive large discounts.

Deliveries are scheduled to begin in 2017 with two planes and with the firm order to be completed in 2021.

“Renewal of our North American narrowbody fleet with more fuel efficient aircraft is a key element of our ongoing cost transformation program,” Air Canada CEO Calin Rovinescu said Wednesday after markets closed.

He said the purchase of new planes will yield a 10 per cent reduction in costs per seat as a result of lower fuel and maintenance expenses.

Air Canada’s domestic rival WestJet (TSX:WJA) exclusively flies Boeing 737 planes in its mainline fleet. The Calgary-based airline recently ordered 65 Boeing 737 MAX aircraft and substituted 15 of its existing Boeing 737 NextGen 737 aircraft order with the newer model.

As part of Air Canada’s order, Boeing will purchase up to 20 of the airline’s fleet of 45 Embraer E190s, which will be replaced with larger leased planes until the new 737 aircraft are delivered.

The Montreal-based airline said it will also evaluate over the next six months the replacement of its remaining 25 E190 aircraft with more cost-efficient planes such as Bombardier’s 110- to 160-seat CSeries.

Bombardier spokesman Marc Duchesne confirmed Wednesday that discussions continue with Air Canada about the potential purchase of CSeries planes.

The airplane order comes as Air Canada is about the receive the first of 37 widebody Boeing 787 Dreamliners early next year. It plans to transfer up to 50 Boeing 767 and Airbus A319s to its low-cost Rouge airline.

Air Canada said its total fleet, including Rouge but excluding aircraft flown by regional partners, is expected to grow to about 214 by the end of 2019 from 192 as of Sept. 30.

In addition to the narrowbody order, Air Canada has options and rights to purchase 10 Boeing 787 planes and 13 large Boeing 777s.

“We’re honoured that Air Canada chose Boeing to lead its fleet renewal plan,” said Brad McMullen, vice-president of North America sales for Boeing Commercial Airplanes.

The Boeing 737 MAX airplanes will use CFM International LEAP-18 engines that promise to deliver a 14 per cent improvement in fuel efficiency over the current narrowbodies in service.

Walter Spracklin of RBC Capital Markets said that while the order size is “impressive,” RBC believes Air Canada will be able to fund it through its balance sheet.

Spracklin noted that the material portion of deliveries is set to occur between 2018 and 2020, well beyond when Air Canada’s current transformation strategy is in full swing.

“As such, we continue to see no near-term financing risk and we believe this order only enhances Air Canada’s transformation, which we view as still in its early days,” he said.

Air Canada is Canada’s largest domestic and international airline and is among the 20 largest airlines in the world, flying to more than 175 destinations.

On the Toronto Stock Exchange, Air Canada’s shares closed up six cents at $7.68 on Wednesday.