Southwest Extends Bet on Smallest Boeing Max, Speeds Fleet Redo

Southwest Airlines Co. is taking 34 more of Boeing Co.’s 737 Max jetliners next year and speeding a revamp of its fleet just two months after unveiling one of the largest aircraft deals since the coronavirus pandemic began.

The airline is exercising options for Max 7 jets, the smallest version of the narrow-body aircraft, according to a regulatory filing Tuesday. The deal will bring the size of Southwest’s planned Max 7 fleet to 234 aircraft and its total Max order book to 660, cementing the carrier’s status as the model’s biggest customer.

Southwest is stocking up on the jets -- undoubtedly at very attractive prices -- as U.S. airlines battle over a resurgence in leisure travel, said George Ferguson, an analyst at Bloomberg Intelligence. Discounters such as Frontier Group Holdings Inc. and Spirit Airlines Inc. are targeting the kinds of routes between secondary markets that Southwest has long dominated, as are startups Breeze Aviation Group Inc. and Avelo Airlines.

“When I look at leisure in the U.S., it’s outright competitive,” Ferguson said. “These guys are playing the Southwest game, popping into smaller markets.”

Southwest rose less than 1% to $58.80 at 12:08 p.m. in New York trading, in line with a Standard & Poor’s index of the five largest U.S. carriers. Boeing slipped less than 1% to $251.04.

Fleet Mainstay

The Max 7 deal extends the 150-seat model as a mainstay of Southwest’s fleet, complementing the 175-seat Max 8. The smaller plane has a longer range, enabling the Dallas-based carrier to connect cities it can’t now. The jet can also be used for short-distance international routes or service to Hawaii.

Southwest accounted for all but a handful of the 208 Max 7 on order, Ferguson said, citing data from Cirium, an aviation analytics company. The carrier booked 100 of the planes in March.

The airline now expects to spend about $1.5 billion on aircraft next year, up from its previous projection of roughly $700 million, according to the filing. Beyond plans to grow, the airline has said it needs to replace as many as 35 older 737-700 aircraft that it plans to retire each year over the next 10 to 15 years.

While Southwest has a higher cost base than its upstart rivals, it has a better chance to matching their fares and still make money by shifting to smaller planes obtained at “bargain-basement prices,” Ferguson said. Boeing has offered discounts on new orders to save cash and compensate customers after two deadly Max crashes spurred the longest jetliner grounding in U.S. history.

Improving Airfares

The Dallas-based carrier also moved forward another 64 existing Max 7 options to between 2023 and 2025, and added 32 new options for aircraft that could be delivered in 2026 and 2027. Southwest is evaluating its remaining 40 Max options for 2022.

Leisure travel and fares continue to improve, the airline said, as more people are vaccinated against Covid-19 and virus cases decline. June operating revenue will be at the higher end of Southwest’s previous expectations, and will improve further in July, while fares in both months should be comparable to prepandemic rates.

The carrier is adding back flying capacity to meet demand, and expects to operate at 97% of 2019 levels in July. Southwest also is seeing “modest consistent improvements” in business travel, with corporate revenue down 77% last month from the same period in 2019, compared with a 90% drop in February.

©2021 Bloomberg L.P.

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