[ad_1]
For the vast majority of its history, Southwest Airlines (NYSE: LUV) has operated exclusively one type of aircraft: the Boeing (NYSE: BA) 737. However, the company is finally thinking about changing that. During Southwest’s third-quarter earnings call, management said it plans to place a major order for aircraft in the 140-150-seat range as soon as late 2021. While the airline is considering Boeing’s 737 MAX 7 , is also looking at the rival Airbus (OTC: EADSY) A220-300.
It will not be an easy decision. Both models have great strengths and weaknesses from Southwest’s perspective. However, the best decision might be to avoid the election entirely by keeping the carrier’s 737-700 in service longer. This is why.
Southwest reconsiders its commitment to the 737
Operating just one type of aircraft has had great benefits for Southwest Airlines over the years. Improves Pilot Productivity – Each pilot can fly every aircraft in the fleet, and pilots never need retraining to fly different types of aircraft. It also simplifies many aspects of Southwest’s operations, reducing costs.
Recently, however, there have been significant drawbacks. Boeing’s flawed design process for the 737 MAX culminated in the global grounding of all 737 MAX aircraft in March 2019. This disrupted the growth of Southwest Airlines last year.
Image Source: Southwest Airlines.
In addition, the Boeing 737 family has shifted to larger and larger aircraft with each new generation. Therefore, the 737 MAX family is optimized for larger variants than what Southwest has traditionally used for most of its fleet. (As of September 30, Southwest’s fleet consisted of 493 143-seat Boeing 737-700s, versus 2411737-800 175-seat 737 MAX 8s.)
As a result, Southwest has begun to consider diversifying away from the 737 family. It has been looking at the A220 specifically since at least the spring of 2019. During the recent earnings call, Southwest gave the biggest indication yet that it is seriously considering adding a second type of fleet. COO Mike Van de Ven indicated that the airline is evaluating the A220-300 against the 737 MAX 7 and expects to place an order “within the next year,” so replacements for the 737-700 could start arriving around 2025.
A great decision
For Southwest, the main advantage of placing a large order for 737 MAX 7s is that it could continue to reap the benefits of operating only one type of fleet. You could probably get favorable pricing too, as Boeing can’t afford to lose such a large customer.
By contrast, the Airbus A220-300 is a more attractive direct replacement for the 737-700. It would likely have around 145 seats in the Southwest configuration, compared to 150 for the 737 MAX 7. However, it has a maximum takeoff weight just under 70 metric tons – similar to the 737-700 but about 10 metric tons more. lower than the 737 MAX 7.
The added weight of the 737 MAX 7, a family legacy optimized for larger variants, means that it is likely to burn significantly more fuel than the A220-300. You will also incur higher landing fees. In addition to seeking the best possible price, Southwest must determine whether the A220-300’s inherent efficiency advantage over the 737 MAX 7 can outweigh the additional complexity of introducing a second type of fleet.
The case of doing nothing
Southwest’s 737-700s are its oldest aircraft, but they are still only 16 years old on average. Many airlines routinely operate narrow-body aircraft up to the age of 30. About 80% of its remaining 493 737-700s were built in 2001 or later and will not reach the 30-year mark for more than a decade.
That’s significant because brand-new single-aisle jets using next-generation engine technology are likely to be available in the early 2030s. In other words, if Southwest can delay replacing most of its 737-700s until after 2030, it may have new (and better) options on the table from Boeing and Airbus.
Meanwhile, Southwest Airlines is tentatively aiming for a roughly 50/50 balance between smaller jets like the 737-700 and its fleet of 175 seats 737-800 and 737 MAX 8. Currently, the 737-700 outnumber its largest jets by more than 2 to 1. That’s why the airline currently has firm orders for 235 737 MAX 8s, compared to just 30 737 MAX 7s.
Southwest is likely to want to grow its fleet to between 900 and 1,000 aircraft over the next decade. If you keep 400 737-700s around and buy maybe 50 737 MAX 7s to serve certain niche routes, you could meet the rest of your growth and replacement needs with the 737 MAX 8 while maintaining a roughly 50/50 split between smaller aircraft. and bigger. in your fleet. (There may also be opportunities to replace older 737-700s with cheap used 737-700s that other airlines are recalling.)
The 737 MAX 7 and A220-300 have their merits, but neither is an ideal aircraft for Southwest Airlines. With few aircraft desperately in need of replacement, Southwest might be better off preserving its capital for now and making a bold bet on next-generation aircraft technology that could be available around 2030.
[ad_2]
