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For the vast majority of its history, Southwest Airlines (NYSE: LUV) only operated one type of aircraft: the Boeing (NYSE: BA) 737. However, the company is finally considering changing this. During Southwest’s third-quarter earnings call, management said it plans to place a major order for 140- to 150-seat jets by the end of 2021. While the airline is considering the 737 MAX 7 from Boeing, she is also looking at the rival. Airbus (OTC: EADSY) A220-300.
It will not be an easy decision. Both models have major strengths and weaknesses from a Southwest perspective. Still, the best decision might be to avoid the choice altogether by keeping the carrier’s 737-700s in service longer. Here’s why.
Southwest rethinks its commitment 737
Operating a single type of aircraft has had major benefits for Southwest Airlines over the years. This improves pilot productivity: each pilot can fly all the planes in the fleet, and pilots never need to be retrained to fly different types of planes. 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 resulted in the worldwide 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 evolved into ever larger aircraft with each new generation. The 737 MAX family is therefore 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, compared to 241 175-seat 737-800s and 737 MAX 8.)
As a result, Southwest has started to consider branching out of the 737 family. It has been looking specifically at the A220 since at least the spring of 2019. In the recent earnings call, Southwest gave the biggest indication yet that ‘he was seriously considering adding a second type of fleet. COO Mike Van de Ven said the airline is evaluating the A220-300 over the 737 MAX 7 and plans to place an order “within a year or so,” so the 737-700 replacements may begin arriving around 2025.
A big decision
For Southwest, the main benefit of placing a large 737 MAX 7 order is that it could continue to reap the benefits of operating a single type of fleet. It could also benefit from lower prices, as Boeing cannot afford to lose such an important customer.
In contrast, the Airbus A220-300 is a more convincing 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. Yet it has a maximum takeoff weight of just under 70 tonnes: similar to the 737-700 but about 10 tonnes less than the 737 MAX 7.
The extra weight of the 737 MAX 7 – a family heirloom optimized for larger variants – means it is likely to consume significantly more fuel than the A220-300. It will also result in higher landing fees. In addition to seeking the best possible price, Southwest must consider whether the inherent efficiency advantage of the A220-300 over the 737 MAX 7 can outweigh the added complexity of introducing a second type of fleet.
The case of doing nothing
Southwest’s 737-700s are its oldest planes, but they’re still only 16 years old on average. Many airlines regularly operate narrow-body jets for up to 30 years. About 80% of its remaining 493,737-700 were built in 2001 or later and won’t hit the 30-year mark for more than a decade.
This is important because brand new single-aisle jets using next-generation engine technology will likely be available in the early 2030s. In other words, if Southwest can delay replacing most of its 737-700s until ’till after 2030, there could be new (and better) options on the table for Boeing and Airbus.
In the meantime, Southwest Airlines is tentatively aiming for a roughly 50/50 balance between smaller jets like the 737-700 and its 175-seat 737-800 and 737 MAX 8 fleet. Right now, the 737-700 outnumber its biggest jets by more than 2 to 1. That’s why the airline currently has firm orders for 235,737 MAX 8, down from just 30,737 MAX 7.
Southwest will likely want to grow its fleet from 900 to 1,000 aircraft over the next decade. If it keeps 400 737-700 and maybe purchases 50 737 MAX 7 to serve some niche routes, it could meet the rest of its growth and replacement needs with the 737 MAX 8 while maintaining a breakdown of around 50 / 50 between smaller and larger jets. in its fleet. (There may also be opportunities to replace the older 737-700s with inexpensive used 737-700s that other airlines are abandoning.)
The 737 MAX 7 and the A220-300 both have their merits, but neither is an ideal aircraft for Southwest Airlines. With few planes in desperate need of replacement, Southwest might be better off preserving its capital for now and making a bold bet on next-generation aviation technology that could become available around 2030.
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