Thursday, June 23, 2016

Southwest Airlines Revamps Aircraft Order Book: To take fewer Boeing 737-Max aircraft than planned through 2022

Kathryn's Report:

The Wall Street Journal
By Susan Carey 

Southwest Airlines Co., finalizing a revamp of its fleet strategy that began in 2012, on Thursday told investors it is deferring delivery of Boeing Co.’s new 737-Max aircraft to take fewer than earlier planned through 2022, in part to reduce its near-term capital expenditure budget.

The nation’s leading discount carrier has 330 Boeing 737s on firm order for delivery through 2025, as compared with 328 through 2024, its previously reported delivery schedule. Its number of planes on option remains the same. But the new plan will significantly lower the number of new planes entering the fleet from 2018 through 2022, Southwest Chief Financial Officer Tammy Romo said at an investor day presentation Thursday.

This year and next, the Dallas-based carrier plans to boost deliveries, in part to compensate for the previously announced early retirement of about 50 older-version 737s by 2017. It will add 67 planes in 2017, compared with the previously envisioned 61. Some of the additional planes are used 737-700s Southwest has found on the market at good prices. Others are new 737-800s it had on firm order and the third tranche, starting next year, are Boeing’s new-engined version of the 737, the so-called Max-8.

Ms. Romo said the new fleet plan will defer $1.9 billion of aircraft capital spending by 2020. Southwest’s aircraft capex this year will be $1.3 billion, rise next year and then retreat. Beyond 2020, the company will be able to keep that spending at manageable levels, she said. The deferral of 67 firm deliveries over the next several years supports the goal of 2% annual net fleet growth.

Southwest, which flies only variants of Boeing 737s, expects to end this year with 723 planes in its fleet, a number that will dip to 700 in 2017 before rising again to between 730 and 750 aircraft in 2018.

Boeing, in a statement, said its strong 737 order book gave it the flexibility to help Southwest accelerate deliveries in the near term, then sequence its receipt of 737s over the longer term. The manufacturer said it continues to see healthy demand in the single-aisle aircraft market. Industry experts believe because the Max model is in such demand, Southwest’s deferrals in taking some of those models could help Boeing work with other airline customers who want to move up their delivery positions.

Bringing in the new planes will boost fuel efficiency and lower maintenance costs, Ms. Romo said. In an earlier investor presentation, she said the Max has 14% more fuel efficiency than Southwest’s 737-700s and 737-800s. The Max is about 20% more fuel efficient that the 737-300s that are being retired.

The airline, No. 4 in the U.S. by traffic, had intended to retire about 50 old-model 737s by mid-2018. But in January, it moved up that date to the third quarter of 2017, so those planes will be out of the system before it starts taking new Max-8 planes. The decision to accelerate those retirements was made to alleviate the need to have separate training regimes for the pilots.

Ms. Romo also said Southwest, which plans to add a new reservation system in 2017, expects that IT cost to reach $500 million. But the benefits of the modern technology and new functionality should allow the carrier to recoup that investment by 2020, she said.

Original article can be found here:

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