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Southwest Airlines Pushes Back Late 737 MAX Deliveries

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Southwest Airlines Pushes Back Late 737 MAX Deliveries

Southwest Airlines Pushes Back Late 737 MAX Deliveries
June 24
09:31 2016

MIAMI — Southwest Airlines has deferred the delivery of 67 Boeing 737 MAX 8 aircraft from 2019-2022 to 2023-2025, pushing back roughly $1.9 billion of capital expenditures. Southwest has 200 737 MAX 7s and 8s on order, and it is scheduled to be the launch customer of the type. Those plans will not change under the proposed deferral, and Southwest will take its full allotment of MAX 8s for 2017 and 2018.

Southwest will also accelerate deliveries of 737 Next Generation (737NG), of which it has outstanding orders for 76 new 737-800s and 21 used 737-700s in 2017 to make up for some of the deficit in the deliveries.

Gary Kelly draws ties to 737 Classic battle with pilots


Naturally, this decision by Southwest is likely to raise questions as to whether it is motivated by the protracted battle that Southwest is engaged in with its pilots over the fate of the airline’s remaining fleet of Boeing 737-300s. This April, Southwest accelerated retirements of the 737 Classic series (-300 and -500 series) so as to avoid any uncertainty with the Federal Aviation Administration (FAA) over pilot training schemes for pilots on both the Classic series and MAX.

While nothing has been set in stone yet, there were indications that the FAA would not allow pilots to be jointly trained on the 737 Classic series and the 737 MAX, though they could be jointly trained with both aircraft and the 737 NG. In a vacuum, this was not a huge issue as Southwest could simply spin off a portion of its pilot group to exclusively fly the 737-300s, and then get re-trained on the 737 MAX.

But last month, Southwest’s pilot union actually sued the carrier over its fleet plans to try and gain leverage in contract negotiations. Their rationale, was that since the 737 MAX was a separate type in the eyes of the FAA, Southwest would need its pilots to sign off on the acquisition of the new type, as has been historical precedent at the company. For its part, Southwest maintains that the 737 MAX 8, given its strong commonality with the 737NG, is functionally the same aircraft. But regardless of who was in the right, Southwest’s pilots were able to gain leverage over management.

With that as the backdrop, it is natural to assume that at least part of the rationale behind this move is to gain some leverage back over the pilots, as Gary Kelly hinted at yesterday’s investor day event: “We’ll put the MAX into service as soon as we get the Classics retired. That is our issue. We don’t have a pathway to fly both aircraft at the same time.” Both in terms of gaining clarity on whether the 737 MAX 8 is to be considered a separate type in a fleet with only 737NGs, and in terms of deferring growth (which is always a pilot priority), Southwest’s deferral shifts some of the balance of power back to itself.

Broader focus is increasing cash flow and a bet on low fuel


But while the issues around pilot training and the like have grabbed most of the headlines, our view is that the larger motivation for this move is to please Wall Street, specifically by boosting free cash flow (and potentially returning some of that to investors) and by reducing capacity growth. In the current fuel environment, the 737-700s and especially 737-800s are highly cost-efficient, and rather than spending billions of dollars on aircraft for growth, Southwest can instead return that $1.9 billion to investors in the form of dividends or share buybacks. That certainly forms one part of the rationale.

The other piece is that this is a way for Southwest to moderate capacity growth. Ever since the airline’s stock tumbled last year over a increase in forward capacity growth plans of 1%, Southwest’s management team has been noticeably reticent to favor growth in both rhetoric and actions. Regardless of our views of the myopia of Wall Street’s position, the fact remains that it will reward Southwest for capacity growth in the 5% as opposed to 7-8% range. With the 737-800s available anyway for that more moderate growth level, this is a no brainer response to market signals by Southwest.

Boeing will be able to offer the delivery slots


For its part, despite a temporary moment of bad press, this deferral doesn’t truthfully affect Boeing all that much. Especially since Southwest will still be the launch carrier, Boeing now gains several early slots that it can offer to carriers, and 67 slots are enough to win a major outstanding order, perhaps a LCC or a mid-sized legacy airline.

The 737 MAX is oversubscribed, and all this does is free up early delivery slots for Boeing to sell, as there is little risk of Southwest cancelling the order outright.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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3 Comments

  1. RICHARD CAMPBELL
    RICHARD CAMPBELL June 24, 10:24

    Southwest Airlines is not in a good position right now with its Pilots about changing to a new aircraft, and had to rethink its decision on when to receive its aircraft. Not a bad move but, it still will need to deal with the problem.

  2. Kevin
    Kevin June 24, 10:54

    With open delivery slots at Boeing, will Qatar drop it’s Neo order and make the switch?

  3. Roberto Leiro
    Roberto Leiro June 24, 16:19

    It is unlikely. The earliest slots will be available in three years, and Qatar Airways GCEO has already stated that the aircraft to fuel the airline’s expansion plans are needed as soon as possible.

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