08/29/2013 09:46 EDT | Updated 10/29/2013 05:12 EDT

WestJet looked at CSeries but opts to buy 65 Boeing 737 MAX for US$6.3B

WestJet Airlines considered buying Bombardier's new CSeries aircraft and Airbus' re-engined aircraft but opted to expand its fleet by purchasing 65 Boeing 737 MAX aircraft, worth US$6.3 billion at current list prices.

The airline said it has signed a letter of intent for 40 737 MAX 8s and 25 of the smaller 737 MAX 7s with an ability to upgrade the order to the larger 737 MAX 9 aircraft.

Deliveries of the new MAX aircraft are expected to start in September 2017 and continue for a decade.

"We are proud to continue our long-standing relationship with Boeing and are thrilled that we will be among the first North American airlines to fly the new 737 MAX in its first year of commercial operation," stated CEO Gregg Saretsky.

The planes will have more fuel-efficient engines and a new interior design, including larger overhead bins.

Although it didn't engage in a formal bidding process, the Calgary-base airline said it looked at the CSeries and A320.

"At the end of the day, the piece that excited us about the Boeing MAX is the commonality with what we have today," spokesman Robert Palmer said in an interview.

Despite being powered by new CFM engines, the MAX will have a 70 per cent commonality with WestJet's existing 737 Next Generation fleet, which will save on training for pilots, flight attendants and mechanics. The airline plans to maintain its single seating class with three rows of premium economy seating.

The plane promises to be 14 per cent more fuel-efficient than existing models, which is an important costs saving for the airline which spent $992 million on fuel last year.

As part of the deal, WestJet plans to cancel the purchase of 15 737 aircraft it already has on order from Boeing that were to be delivered between December 2014 and 2018.

The purchase, once finalized, will bring the total number of planes the airline has on order from Boeing to 92.

Canada's second-largest domestic carrier (TSX:WJA) said its fleet of 103 Boeing aircraft could ultimately range between 120 and 162 over 10 years as older models come off lease and some planes are sold.

The company expects the order will double its capital expenditures to between $210 million and $220 million in the third quarter, and raise full-year spending to between $690 million and $710 million. However, the planned substitution of the 15 planes would reduce capital spending between 2014 and 2017.

Boeing has about 1,500 firm orders for the new 737 MAX planes, including five North American airlines.

Analyst Walter Spracklin of RBC Capital Markets said the order gives WestJet some breathing room to develop its Encore regional service by deferring the delivery of 15 planes while still allowing it to increase its fleet size as conditions warrant.

He said flexibility is the main driver behind the order, not capacity growth. While the order is large, the airline will not receive its first 737 MAX until 2017 and the delivery schedule is spread over a decade.

Spracklin noted WestJet has more than 30 older aircraft coming off lease and it plans to sell 10 planes in 2014 and 2015. Capacity growth is also expected to be lower between 2014 and 2017 than previously anticipated.

"Accordingly, we view this order as agnostic on demand, and instead allows the company flexibility across a more efficient fleet," he wrote in a report.

Its shares closed down 21 cents, or 0.85 per cent, to $21.80 Thursday on the Toronto Stock Exchange.

WestJet flies to 87 destinations in North America, Central America and the Caribbean.