For the vast majority of its history, Southwest Airlines (NYSE:LUV) has exclusively operated one aircraft type: the Boeing (NYSE:BA) 737. However, the company is finally thinking about changing that. During Southwest's third-quarter earnings call, management said that it plans to place a major order for jets in the 140 to 150 seat range as soon as late 2021. While the airline is considering Boeing's 737 MAX 7, it is also looking at the rival Airbus (OTC:EADSY) A220-300.
It won't be an easy decision. Both models have major strengths and weaknesses from Southwest's perspective. Yet the best decision might be to avoid the choice altogether by keeping the carrier's 737-700s in service longer. Here's why.
Southwest rethinks its 737 commitment
Operating a single aircraft type has had major benefits for Southwest Airlines over the years. It improves pilot productivity: Every pilot can fly every plane in the fleet, and pilots never need to be retrained to fly different aircraft types. It also simplifies numerous aspects of Southwest's operations, reducing costs.
Recently, though, there have been significant drawbacks. Boeing's flawed design process for the 737 MAX culminated in the worldwide grounding of all 737 MAX jets in March 2019. This disrupted Southwest Airlines' growth last year.
Additionally, the Boeing 737 family has shifted toward ever-larger aircraft with each new generation. The 737 MAX family is therefore optimized for larger variants than what Southwest has traditionally used for the bulk of its fleet. (As of Sept. 30, Southwest's fleet consisted of 493 143-seat Boeing 737-700s, versus 241 175-seat 737-800s and 737 MAX 8s.)
As a result, Southwest has started to consider diversifying away from the 737 family. It has been looking at the A220 specifically since at least the spring of 2019. During the recent earnings call, Southwest gave the biggest indication yet that it is seriously considering adding a second fleet type. Chief operating officer Mike Van de Ven indicated that the airline is evaluating the A220-300 against the 737 MAX 7 and expects to place an order "within the next year or so," so that 737-700 replacements could begin arriving around 2025.
A big decision
For Southwest, the main advantage of placing a big 737 MAX 7 order is that it could continue reaping the benefits of operating a single fleet type. It could probably get favorable pricing, too, as Boeing can't afford to lose such a big customer.
By contrast, the Airbus A220-300 is a more compelling direct replacement for the 737-700. It would likely have about 145 seats in Southwest's configuration, compared to 150 for the 737 MAX 7. Yet it has a maximum take-off weight just shy of 70 metric tons: similar to the 737-700 but about 10 metric tons lower than the 737 MAX 7.
The 737 MAX 7's extra weight -- a legacy of the family being optimized for larger variants -- means it is likely to burn significantly more fuel than the A220-300. It will also incur higher landing fees. Aside from seeking the best possible price, Southwest must determine whether the A220-300's inherent efficiency advantage over the 737 MAX 7 can offset the added complexity of introducing a second fleet type.
The case for doing nothing
Southwest's 737-700s are its oldest planes, but they are still only 16 years old on average. Many airlines routinely operate narrow-body jets up to 30 years of age. Roughly 80% of its 493 remaining 737-700s were built in 2001 or thereafter and won't reach the 30-year mark for more than a decade.
That's significant because all-new single-aisle jets using next-generation engine technology are likely to become available in the early 2030s. In other words, if Southwest can delay replacing the bulk of its 737-700s until after 2030, it may have new (and better) options on the table from Boeing and Airbus.
In the meantime, Southwest Airlines is tentatively aiming for a roughly 50/50 balance between smaller jets like the 737-700 and its fleet of 175-seat 737-800s and 737 MAX 8s. At present, the 737-700s outnumber its larger jets more than 2-to-1. That's why the airline currently has firm orders for 235 737 MAX 8s, compared to just 30 737 MAX 7s.
Southwest will likely want to grow its fleet to between 900 and 1,000 airplanes over the next decade. If it keeps 400 737-700s around and buys perhaps 50 737 MAX 7s to serve certain niche routes, it could meet the rest of its growth and replacement needs with the 737 MAX 8 while maintaining a roughly 50/50 split between smaller and larger jets in its fleet. (There also may be opportunities to replace older 737-700s with cheap used 737-700s that other airlines are retiring.)
The 737 MAX 7 and A220-300 both have their merits, but neither is an ideal aircraft for Southwest Airlines. With few aircraft desperately in need of replacement, Southwest might be better off preserving its capital for now and making a bold bet on next-generation aircraft technology that could become available around 2030.