As Southwest Airlines navigates its way out of the crisis, the carrier is sitting on incredible flexibility with its order book. Recording over 730 Boeing 737 jets in its fleet already, the airline is one of the largest carriers in the world and has plenty of room to grow even bigger. Speaking on the airline’s second-quarter earnings call, Southwest’s executives indicate that the carrier is looking closely at its MAX options in 2022, and it may end up taking all, or at least most, of the options it has.
Southwest Airlines on its Boeing 737 MAX options
Southwest Airlines announced a blockbuster Boeing 737 MAX order for 100 firm aircraft and 155 options in March. It followed up in June with an expansion of its 2022 firm orders by 34 aircraft, meaning it had 64 firm MAX 7s on order and accelerated 10 MAX options from 2023 to 2022. Then, on July 1st, the carrier exercised three options for delivery in 2022 . Thus, It ended the second quarter with 67 firm MAX 7s and 47 options.
However, as part of its second-quarter earnings release, the carrier also announced it intended to exercise three of its 47 options. This takes its overall firm commitment, once finalized, to 70 MAX 7 jets and 44 MAX options for 2022.
On the carrier’s second-quarter earnings call, the airline’s executives were asked whether it was fair to consider that the airline set a “very high bar” to not exercise its options, meaning that the airline had set a very low bar for exercising its options. Chief Financial Officer, Tammy Romo, stated the following on that assessment:
“I think that it’s absolutely fair. As pointed out, we have a very cost efficient Boeing order book. Obviously, we have a very strong balance sheet with ample cash..there is a strong ROI [return on investment] on those options either way.”
Southwest’s plans for the MAX 7s
Taking 70 aircraft in a year is a big deal for Southwest Airlines. That comes in at just under 10% of its current fleet that it would be adding into service. However, the company is turning to a dual-prong strategy with the MAX jets.
As Ms. Romo further stated:
“And obviously, we are hoping we can continue to grow the airline here, but if not, it’s [a] compelling business case for us to retire the older -700s.”
Southwest Airlines has gradually started to draw down its large fleet of Boeing 737-700 jets. The carrier returned one leased 737-700 to a lessor in the second quarter and expects another return to lessor later this year, taking its overall 737-700 retirements in 2021 to 10 aircraft.
Southwest expects over half of its MAX aircraft backlog will go to replacing the 461 Boeing 737-700s it recorded. The drawdown of the 737-700s will take roughly 10 to 15 years. Southwest expects to retire approximately 30 to 35 737-700s annually.
Does Southwest need all those planes?
In a word, yes. There is a very strong business case for the airline to take on the Boeing MAX jets. First and foremost, the airline has come out of the crisis with a strong balance sheet and investment-grade credit ratings. This sets the carrier up to be in a strong financial position to expand the fleet significantly, especially considering the carrier definitely got an excellent deal on the MAX jets.
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The second thing in Southwest’s favor is the flexibility with the MAX 7s. All 70 of the aircraft, if necessary, could be deployed to replace older Boeing 737-700s. The same could be said for any or all of the 44 options Southwest could exercise.
If current demand trends continue, then Southwest can turn to a split usage of the 737 MAX jets toward expanding the airline’s route network and facilitating the retirement of older 737s. Remember, the airline went on a massive expansion spree in 2020 and 2021, and it has added a host of new routes to cater to leisure travelers.
At some point, Southwest Airlines needs to get back to rebuilding its network. This is especially true on the short-haul, higher-frequency routes the carrier operates. It is on routes like those where the MAX 7 would be a perfect fit. This would also help bring the airline back to flying more nonstop passengers over connecting ones.
Also, do note that the options are relatively flexible. Southwest needs to provide advance notification to Boeing for obvious reasons, but it can choose to take more MAX 8s instead of MAX 7s if its fleet needs demand them. The MAX 8s could be especially useful in markets like Hawaii.
Ultimately, the cards appear to be in favor of Southwest Airlines exercising more options for 2022. However, whether it chooses to exercise all 44 remaining options or fewer will depend on what the airline believes its fleet needs will be over the next few years coming out of the crisis.
Do you think Southwest should exercise all of its 737 MAX options? Let us know in the comments!