On Monday, Boeing (NYSE:BA) confirmed that it is revising its design for the smallest member of its workhorse 737 jet family. Whereas the upcoming 737 MAX 7 jet was originally supposed to be the same size as its predecessor -- the 737-700 -- it will now be longer, allowing airlines to fit another 12 seats.
The 737 MAX 7 has not sold well in the five years since Boeing officially launched the MAX program to create a more fuel-efficient "re-engined" version of the 737. Boeing is hoping that this tweak will spur increased demand for its smallest jet.
Smaller planes fall out of favor
Rumors about a possible stretch of the 737 MAX 7 have been floating around for several months now. While Boeing has brought in more than 3,200 firm orders for its new 737 MAX family, just 60 of those orders are for the smallest variant. Nearly all of those 737 MAX 7 orders came from just two airlines: Southwest Airlines (NYSE:LUV) and WestJet.
Smaller 737 variants have sold poorly for the past decade or so. In 2012, Boeing quietly dropped the even-smaller 737-600 from its price list, after not having received a single order since 2005. This left the 737-700 at the bottom of Boeing's lineup -- but even that model has sold poorly in the past decade or so.
There are three main factors weighing on sales of smaller mainline jets like the 737-700 and 737 MAX 7. First, sudden fuel price spikes in the 2007-2008 and 2009-2011 periods have driven airlines to focus on improving their fuel efficiency. Larger narrowbody models tend to be more fuel efficient.
Second, pilot pay is rising quickly due to a shortage of airline pilots. This further supports the move toward larger planes, which can spread the cost of pilot labor over more passengers.
Third, Boeing and Airbus face more competition at the low end of the narrowbody market. Whereas they have a virtual duopoly at the high end of the narrowbody market, Bombardier has started making inroads in the market for small mainline jets. With the only all-new design in the market, Bombardier's CSeries jet can boast better fuel efficiency than its rivals.
Airlines sign off on a bigger 737 MAX 7
Given the trend toward larger airplanes at most airlines, it made sense for Boeing to investigate stretching the smallest 737 variant. The key hurdle was getting its two major 737 MAX 7 customers (Southwest and WestJet) to sign off on the change.
For WestJet, this was probably a no-brainer. With an extra 12 seats, the new 737 MAX 7 in WestJet's configuration will provide an even bigger unit cost improvement over the 737-700.
However, the case for a bigger 737 MAX 7 was less straightforward for Southwest Airlines. Its 737-700s are configured with 143 seats. Adding 12 seats would push Southwest over the "magic number" of 150, forcing it to add a fourth flight attendant.
The fourth flight attendant would drive up costs -- potentially offsetting the benefit from having extra seats. It's possible that Southwest will limit seating capacity on its 737 MAX 7s to 150 in order to avoid this problem. (That would eliminate the fuel-efficiency advantage of lengthening the plane, though.) Alternatively, it could try to increase the MAX 7's capacity to about 160 seats through other seating configuration changes, reducing unit costs further.
Will full-service airlines bite?
Rising pilot costs and worries about future fuel prices made the 737 MAX 7 unappealing in its original form. With room for just 126 seats in a typical two-class configuration for full-service airlines, the fuel and labor costs per passenger were too high to make sense.
With an extra 12 seats, the redesigned 737 MAX 7 should offer a big unit cost advantage over the 737-700 and A319. At the same time, it will serve a distinct market segment relative to the 162-seat 737 MAX 8. Thus, the larger 737 MAX 7 has a better shot at success than the original design.
Still, for it to be successful, Boeing will need to convince airlines not to abandon the sub-150 seat market segment entirely. One positive sign is that Delta Air Lines has expressed interest in the enlarged 737 MAX 7. Boeing has also pitched the aircraft to United Continental. But until full-service airlines start to sign on the dotted line, the future of Boeing's smallest plane will remain cloudy.
Adam Levine-Weinberg owns shares of Boeing and United Continental Holdings and is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.