Wind From the Southwest: Ill News for Boeing?

It's bad enough that Boeing (NYSE: BA  ) has -- apparently -- been caving in right and left on pricing demands internationally. But now comes Forbes, commenting on the news that Southwest (NYSE: LUV  ) will snap up AirTran (NYSE: AAI  ) , and predicting that a bigger Southwest's increased buying heft will help it wring similar concessions out of Boeing.

Yesterday, my Foolish colleague Tim Beyers regaled you with what Southwest's AirTran purchase means to rivals like UAL Corp. (Nasdaq: UAUA  ) and Continental. In essence, the merger makes Southwest a stronger competitor to Delta (NYSE: DAL  ) around the latter's Atlanta hub. It preserves Southwest's status as the nation's No. 4 (by size) airline -- behind United, Delta, and AMR (NYSE: AMR  ) , in that order -- post Continental-United merger. It will quite possibly make Southwest a more profitable company, promising to capture operational "synergies" of perhaps $400 million per year by 2013. At the same time, it keeps Southwest's airplane fleet streamlined, efficient, and all-Boeing.

But speaking of Boeing ... what does the merger mean for Boeing?

I have to admit, Fools, on first reading yesterday's news, and learning of Forbes' take, I was inclined to agree. A combined Southwest/AirTran will boast an airfleet of 682 Boeings. That's a tremendous chip Southwest can play against Boeing in any negotiations for future airplane sales. By way of comparison, when first Rosavia, then Aeroflot (aka Russian Technologies), inked twin deals to purchase 737 airliners from Boeing earlier this year, the companies were reportedly able to extract "below-market" rates as Boeing haggled most willingly in an effort to edge Aeroflot out. So what's to prevent Southwest from using its huge size to extract similar price concessions from Boeing?

One word: self-interest.

Fools, I cannot believe it's a coincidence that when Southwest went looking for a discount merger partner, it chose all-Boeing AirTran over, say, Airbus/Embraer hybrid JetBlue (Nasdaq: JBLU  ) or all-Airbus, near-IPO Spirit Airlines. Seems to me, one reason Southwest is so confident in its ability to achieve large synergies in this deal is because it's sticking with an all-Boeing fleet. Flying just one manufacturer's planes lowers pilot training and maintenance costs dramatically, and is one reason Southwest has maintained an unbroken record of profitability for 37 straight years. It gives Southwest strong incentive to stick with Boeing -- whatever the costs.

So my take: Buying AirTran looks like good news for Southwest shareholders, but it's even better news for Boeing.

Embraer and Southwest Airlines are Motley Fool Stock Advisor recommendations, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


Read/Post Comments (7) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On September 28, 2010, at 11:37 PM, MD95 wrote:

    Foolish article... The Boeing 717 was originally designed, certificated, and manufactured as the McDonnell Douglas MD-95. When Boeing bought McDonnell Douglas, they changed the name of the MD-95 to the Boeing 717 as a marketing gimmick. There is no commonality of aircrew training, maintenance training, or parts/logistics supply items between the Boeing 717 (MD-95) operated by and the Boeing 737 operated by both AirTran and Southwest Airlines.

    Pilots qualified to fly the Boeing 717 are actually certificated with type ratings for the McDonnell Douglas DC-9 (predecessor of the MD-95). There is no FAA-approved "dual qualification" between the Boeing 717 and the Boeing 737. Same goes for maintenance training.

    The parts/logistics requirements for the B-717 are supported within the parts pool for the DC-9 and MD-95 aircraft. There is virtually nothing common between the parts pool for the B-737 and the B-717.

    And regardless of who receives proceeds for sustainment of the B-717 and B-737 fleets, I do NOT see this as a win for Boeing. Southwest was set to order the B-737-800 aircraft. But, with perhaps some excess aircraft capacity to be realized now by the merger, why would Southwest be in the market still for new Boeing 717-800 airplanes?

  • Report this Comment On September 28, 2010, at 11:42 PM, MD95 wrote:

    Meant to say... "why would Southwest be in the market still for new Boeing 737-800 airplanes? "

  • Report this Comment On September 29, 2010, at 9:24 AM, MD96 wrote:

    MD 95 is right on! Foolish article indeed. The complete lack on commonality between the B717/MD95 and the B-737 is obvious. The issue of being able to extract price concessions from Boeing as it relates to Aeroflot has more to do with politics of the moment than with sound business. in the end just look at what Ryan Air is doing and not getting from Boeing (not yet).

    In the end of the day Southwest will likely dispose of the B717 and replace it one for one with the more capable 737-700. IMO this is not good news for Boeing in the long run since it will divert its attention from the desperately needed 737 replacement.

  • Report this Comment On September 29, 2010, at 10:09 AM, TMFDitty wrote:

    Which brings me to the point I intended to include, but lacked word-space for in the article proper: I predict Southwest will begin phasing out the 717 as part of its integration and capacity rationalization.

    As new capacity needs arise, I would expect the company to purchase new 737-NGs from Boeing -- so actually, this is a win twice-over. (If things play out as I predict.)

    TMFDitty

  • Report this Comment On September 29, 2010, at 10:59 AM, ATPwMBA wrote:

    Valid points from MD95 & MD96. The MD series and 737NG series do not even share the same terminology for the same instruments and parts even though both are now managed by Boeing. There are NO training efficiencies with an all-Boeing fleet composed of multiple types; Southwest's efficiencies are enjoyed because they have only ONE type. TMF's comment about phasing the 717's out and replacing them with 737NG's may save on training costs, but the capital costs will far offset them for years to come (A B-737NG costs more than 3 times the value of the current 717's; trying to recoup the capital investment with their low-cost business model will be a challenge). Not mentioned in the article is how do you expect to gain purchasing power when Boeing knows you want to be an all-Boeing fleet. Also, how will you solve the labor and culture issues between work groups. Southwest's history is to staple seniority lists of acquired employee groups to the bottom of their list. If this happens, your bags may be happy, but your pilots won't!

  • Report this Comment On September 29, 2010, at 11:58 AM, lcwclw wrote:

    ATPwMBA: Southwest has pilots for over 500 aircraft. AirTran has pilots for 140 aircraft. Those numbers alone would suggest it is smarter to keep the larger employee group happy. Your last sentence just didn't make sense to me.

  • Report this Comment On September 29, 2010, at 12:54 PM, therealarod wrote:

    SWA is going out on a limb with the 717, but let's not forget that nearly half of AirTran's fleet is 737-700. We are talking 86 plans out of nearly 700. And AirTran has orders for about 60 more -700.

    Also, let's consider that SWA is flying nearly 200 -300 and -500 aircraft, that are marked for replacement in the next 5-7 years with either -700 or -800 (if approved).

    So #1, the efficient modern 717 could be used very quickly to retire the 737-500 if the unions are agreeable. There is a difference of 5 seats between the two aircraft. That is 25 out 86.

    #2, the other 60 would be used for several years on the shorter AirTran routes until the orders for new -700 and -800s come in to replace the -300s and the remaining 717s.

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