Southwest Airlines placed a massive Boeing 737 MAX order today. In the order announcement, the carrier touted its fleet flexibility, its confidence in the 737 MAX, and continued fleet simplicity as a reason for choosing the Boeing narrowbody. As Southwest expanded its Boeing 737 MAX 7 order book, it has already started setting out a course for retiring more Boeing 737-700 aircraft.

Southwest's massive MAX order

Capping off new orders from Alaska Airlines, Ryanair, and United, Southwest Airlines worked with Boeing for an agreement to take 100 firm new orders for Boeing 737 MAX 7 jets. The airline also converted some of its MAX 8 orders to MAX 7 orders and added more options for MAX jets.

Now sitting on 349 firm Boeing 737 MAX orders, including 200 MAX 7 and 149 MAX 8 jets with 270 options, the airline is now looking at its current fleet and planning retirements for additional Boeing 737-700 aircraft. With deliveries of the MAX 7 set to start next year, the airline is planning a long-term flexibility strategy that can pass the current crisis and weather any upcoming ones.

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Boeing 737-700 retirements

Southwest retired 36 Boeing 737-700 aircraft in 2020. The airline ended 2020 with a fleet of 470 737-700s with an average age of 16 years old. Eight additional retirements followed in early 2021, bringing Southwest to 462 737-700 aircraft. Another nine Boeing 737-700 retirements are expected this year.

With these aircraft orders, Southwest expects that over half of the firm orders will replace a "significant amount" of its 462 737-700s. The airline plans to retire these aircraft over the next 10 to 15 years as many jets start approaching their mid-20s in age.

Southwest's delivery schedule for the Boeing 737 MAX jets reflects when an increased pace of 737-700 retirements could occur:

Boeing 737-700 retirements should start to pick up in 2022 onwards. As Southwest targets a maximum of around 60-70 new aircraft per year, a smaller but still significant number of Boeing 737-700 jets should exit the fleet each year. This is especially true of the older Boeing 737-700s.

Southwest highlights flexibility

With the retirements, Southwest has plenty of flexibility. Tammo Romo, Executive Vice President and Chief Financial Officer, stated the following on the economic flexibility with the order:

"We remain diligent in managing costs and capital spending, in particular in this environment. Our refreshed order book 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 737-700 retirement plans—allows the opportunity to manage our fleet needs over the next decade.

"We now estimate contractual aircraft capital spending for all years 2021 through 2026, which consists of 169 MAX firm orders with Boeing (135 MAX 7 and 34 MAX 8 aircraft), to be approximately $5.1 billion. Our estimated contractual aircraft capital spending remains immaterial in 2021, and is expected to be approximately $700 million in 2022."

Southwest Airlines is continuing "to plan for multiple fleet and capacity scenarios." This is likely referring to the uncertain demand outlook where Southwest may not need the capacity of both the Boeing 737 MAX jets and the 737-700s. In those instances, 737-700 retirements are expected to accelerate since those aircraft are predominantly old, aging, and ripe for retirement.

The other thing to look out for is how Southwest reacts to its options. Options in the aviation world refer to agreements that allow an airline to purchase jets for a previously agreed-upon price and date without firming those orders.

If Southwest exercises those options, which could be either MAX 7 or MAX 8 jets, the carrier could easily move to retire hundreds of additional Boeing 737-700s. The 737-700 fleet is large, so retiring them will take time, which is why Southwest is releasing some guidance on deliveries through this decade and early into the next.

A scenario where Southwest would exercise the MAX options would be one where the demand outlook improves, and Southwest turns back into an annual profit. If it has the cash to pay for the new aircraft or else gets attractive financing or leasing options, then taking the options would probably be a no-brainer for the airline, especially if fuel prices continue to stay high.

Acquiring new aircraft can be an expensive endeavor. While Southwest, undoubtedly, received attractive pricing on the MAX jets, the airline still needs to ensure that the revenue environment will be better to pay for the new aircraft, even if the carrier gets them at a bargain.

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 does not, or another crisis hits, the airline has fleet flexibility and options to work with.

Do you think Southwest should exercise its options and retire more Boeing 737-700s? Let us know in the comments!