Southwest Airlines has a lot of aircraft on order from Boeing. But they said some very strange things on their earnings call. They’re bringing on planes, but aren’t going to grow their flying at a rate faster than GDP.
In fact, they say growth in their flying is expected to come from taking their current planes and keeping them in the air more – redeyes, and faster turn times on the ground – not from Boeing deliveries. That has to mean they’ll be cancelling or deferring deliveries. They just haven’t announced it yet.
Jefferies analyst Sheila Kahyaoglu asked Southwest CFO Tammy Romo,
When you look at the contractual order book, it has 70 aircraft getting delivered plus ASMs from the red-eye aircraft. So how should we think about that in the context of at or below GDP growth? Are we getting to the point maybe where fleet growth needs to be net neutral? Do you accelerate retirement? How do we think about that?
Romo replied that they “we have a lot of flexibility with our order book from Boeing.” They’ll lay out their fleet plan at their Investor Day in late September.
[W]e have ample flexibility to reflow the order book to ultimately meet our needs. And we’ll balance all of that clearly, given all of our objectives and including CapEx spend and also our initiative to renew the fleet. So we’ll lay out all those details for you at Investor Day.
According to CEO Bob Jordan, Investor Day will lay out three things:
- “transformational commercial initiatives” (like assigned seats, extra legroom seats)
- “improved operational efficiency” (such as faster turn times, keeping planes in the air more)
- “capital allocation discipline” (lower capital spending, and the biggest capital outlay is planes)
They’re supposed to take 73 planes from Boeing in 2025 (including 40 Boeing 737 MAX 7s which isn’t certified yet). That seems certain to get squeezed, so that Southwest has much lower capital expenditures in 2025 and grows a lot less than their current order book would suggest without retiring older -700 aircraft. Capital allocation plans may include sale leaseback arrangements, to turn capital spending into current expense. But that would seem to mean growth in excess of what executives are forecasting.
Now, it doesn’t have to be the case that most of their deliveries get cancelled to flatten growth. There are ways that deliveries can simply take the place of current capacity.
- Accelerating 737-700 retirements. This doesn’t seem likely, since Bob Jordan said those will stick around which is why it makes sense to retrofit them with a new premium seating section.
- They’re not planning to densify the cabins as part of the retrofit, so each plane will lose seats when they add extra legroom seating – so new planes just make up for the loss in seats from the retrofits.
In other words, there are other plausible explanations besides deferring or cancelling orders that let Southwest keep capacity constant. They can take some new planes.
However it does seem likely they will be reducing or deferring aircraft deliveries. So far airlines have mostly talked about Boeing delivery delays slowing down their growth plans, although American Airlines did push out plans for Boeing 787-9s. This seems like it will be a major announced slowdown by an airline in their willingness to take new planes.
Another possibility is to take delivery and immediately sell the aircraft to other airlines who are looking to get new airplanes sooner. With production lagging delivery to the degree it is, the new aircraft could possibly be sold for a nice markup.
Southwest has a Max7 issue. With it not being certified, they have been acquiring the larger Max8, the problem is they have gotten so many it has out paced their retirement need of the -800s so they have had to use -8s on routes that historically used -700s so the load factors are down and costs per seat mile are up. Once the -7 gets its TC, a lot of Southwest’s issue will fade. They already said at Q1 they were only going to expect 20 Maxes total for the whole year. It’s not because Boeing cant make them, but rather southwest doesn’t need more than 20 Max 8s this year.
Southwest got hit with a triple header: 1. Xmas Fiasco: After being kind to passengers and going above and beyond to reimburse them, they got hit with a huge fine. Their kindness has waned since then. With that fine, they didn’t negotiate a change to Fed Regs to require proof of disability or which outlines exactly what qualifies as a disability — like all regional transportation organization do (ie, buses, Amtrak). 2. Cheaters which they don’t control for – seat saving should have been banned when they assigned sequential numbers to loyalty and booked together. Signs, notices when booking and having consequences (onboard fine or something) would have dampened the disgust many now have about flying SWA. 3. Boeing. Without having their new planes with ports and larger bins, they truly appear old and more and more “greyhound bus” like. Safety concerns with Boeing planes also didn’t help. SWA needs to re-weigh their Boeing loyalty with the maintenance savings. Of course, Airbus is also behind on their delivery schedule. I fear for SWA’s ability to turnaround, and having an activist investor is at best distracting, at worst another nail in their coffin. Poor, poor Herb Kelleher!!
Most likely swap -7s for -8s, or -9s If SWA is going to add more legroom in the first few rows, the -8s will have at least an extra row gone if not two. Still a better seat mile cost than a row missing from a 700.
The day that Southwest, desperate for a smaller airplane, starts taking deliveries of some A319neo aircraft, will be the day that ends civilization.
Another scenario that could play out is for SWA to buy Breeze Airways who operates the A220-300 in their fleet and apparently has an order for 90 more. The A220 has comparable capacity as the Max 7 and is highly fuel efficient. That would be a relief for SWA but would spell disaster for Boeing as most or all of SWA’s orders for the Max 7 could be canceled. SWA has the largest orders for the Max 7
The disparity in order book vs actual deliveries can be explained by Boeing being hamstrung by the FAA in terms of delivery rate. With the current environment SWA plans to have a much more measured approach to growth but they won’t be cancelling orders.