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Southwest Airlines placed a massive order for the Boeing 737 MAX today. In announcing the order, the carrier touted the flexibility of its fleet, its confidence in the 737 MAX and the continued simplicity of its fleet as the reason for choosing Boeing’s narrow body. As Southwest has expanded its Boeing 737 MAX 7 backlog, it has already started to put in place a plan to retire more Boeing 737-700 aircraft.
Southwest’s massive MAX order
To top off new orders from Alaska Airlines, Ryanair and United, Southwest Airlines worked with Boeing on an agreement to take 100 new firm orders for the Boeing 737 MAX 7. The airline also converted some of its MAX 8 orders. in MAX 7 orders and added more options for MAX jets.
Now sitting on 349 firm orders for the Boeing 737 MAX, including 200 MAX 7 and 149 MAX 8 jets with 270 options, the airline is now reviewing its current fleet and planning retirements for additional Boeing 737-700s. With deliveries of the MAX 7 set to begin next year, the airline is planning a long-term flexibility strategy that can get past the current crisis and deal with the one to come.
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Boeing 737-700 pensions
Southwest retired 36 Boeing 737-700s in 2020. The airline ended 2020 with a fleet of 470 737-700s with an average age of 16. Eight more departures followed in early 2021, bringing Southwest to 462,737-700 aircraft. Nine more Boeing 737-700 retirements are expected this year.
With these aircraft orders, Southwest expects more than half of the firm orders to replace a “significant amount” of its 462,737-700. The airline plans to retire these devices over the next 10 to 15 years, as many jets begin to approach their mid-twenties.
Southwest’s delivery schedule for the Boeing 737 MAX aircraft reflects when an increased pace of 737-700 retirements could occur:
| Firm orders for the Boeing 737 MAX 7 | Firm orders for the Boeing 737 MAX 8 | Boeing 737 MAX options | Total | |
|---|---|---|---|---|
| 2021 | 28 | 0 | 28 | |
| 2022 | 30 | 0 | 42 | 72 |
| 2023 | 30 | 0 | 38 | 68 |
| 2024 | 30 | 0 | 40 | 70 |
| 2025 | 30 | 0 | 40 | 70 |
| 2026 | 15 | 15 | 40 | 70 |
| 2027 | 15 | 15 | 30 | 60 |
| 2028 | 15 | 15 | 30 | 60 |
| 2029 | 20 | 30 | ten | 60 |
| 2030 | 15 | 45 | 0 | 60 |
| 2031 | 0 | ten | 0 | ten |
| Total | 200 | 158 | 270 | 628 |
Boeing 737-700 retirements are expected to start increasing from 2022. With Southwest targeting a maximum of around 60-70 new aircraft per year, a smaller but still significant number of Boeing 737-700s are expected to exit. floats every year. This is especially true of older Boeing 737-700s.
Southwest emphasizes flexibility
With retirements, Southwest has a lot of flexibility. Tammo Romo, Executive Vice President and Chief Financial Officer, said the following about the economic flexibility of the order:
“We remain diligent in managing costs and capital expenditures, especially in this environment. Our up-to-date order backlog with Boeing allows Southwest to preserve the low-cost advantages of a single fleet type, and the balance of firm orders and options – along with flexibility with the 737-700 pension plans – allows to manage the needs of our fleet over the next decade.
“We now estimate contractual capital expenditures on aircraft for all of the years 2021 to 2026, which consist of 169 MAX firm orders with Boeing (135 MAX 7 and 34 MAX 8), at approximately $ 5.1 billion. Our estimated contractual capital expenditures for aircraft remain small in 2021 and are expected to be approximately $ 700 million in 2022. “
Southwest Airlines continues “to plan for multiple fleet and capacity scenarios.” This probably refers to the uncertain demand outlook where Southwest may not need the capacity of the Boeing 737 MAXs and 737-700s. In these cases, 737-700 retirements are expected to accelerate since these devices are mostly old, aging and ready to retire.
The other thing to watch out for is how Southwest is reacting to its options. Options in the world of aviation refer to agreements that allow an airline to purchase jets for a previously agreed price and date without confirming those orders.
If Southwest exercises those options, which could be MAX 7 or MAX 8 jets, the carrier could easily make the decision to withdraw hundreds of additional Boeing 737-700s. The 737-700 fleet is large, so their retirement will take time, which is why Southwest is posting advice on deliveries in this decade and early next.
A scenario where Southwest exercises the MAX options would be a scenario where the demand outlook improves and Southwest returns to annual profit. If it has the cash to pay for the new aircraft, or if it gets attractive finance or lease options, then taking the options would likely be a no-brainer for the airline, especially if fuel prices continue to stay high.
Acquiring a new aircraft can be an expensive endeavor. While Southwest has undoubtedly received attractive prices on the MAX jets, the airline has yet to ensure that the revenue environment will be better to pay for the new aircraft, even if the carrier gets them at a good deal.
Cautious optimism is the name of the game at Southwest right now, and that is clear with this new MAX order. The airline is optimistic that the environment will improve, and even if it doesn’t, or if another crisis strikes, the airline has the flexibility of its fleet and options to work with.
Do you think Southwest should exercise their options and pull out more Boeing 737-700s? Let us know in the comments!
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