Entering 2020, Southwest Airlines (NYSE:LUV) was desperate to get the Boeing (NYSE:BA) 737 MAX back in its fleet as soon as possible. The COVID-19 pandemic changed that in a hurry. As air travel demand plunged, Southwest quickly moved to reduce its near-term aircraft deliveries.

On Wednesday, Southwest announced a new agreement with Boeing that further reduces near-term 737 MAX deliveries. The reluctance of its best customer to take delivery of new aircraft in 2021 highlights how the recertification of the 737 MAX and rollout of COVID-19 vaccines didn't solve all of Boeing's problems.

Aircraft requirements plunge

Southwest Airlines only operates 737s, so the grounding of the 737 MAX in early 2019 upended its fleet plan. Whereas it had intended to expand its fleet last year, its active fleet wound up shrinking nearly 5% due to delivery delays. Prior to the pandemic, Southwest's fleet plan called for receiving a total of 123 new Boeing 737 MAX jets in 2020 and 2021 to catch up on aircraft replacements and fleet expansion.

A Southwest Airlines Boeing 737 MAX parked on the tarmac.

Image source: Southwest Airlines.

By April, Southwest had made dramatic cuts to its fleet plan due to the pandemic. On the company's first-quarter earnings call, management announced that it had reached an agreement with Boeing to take no more than 48 aircraft deliveries through the end of 2021.

On Wednesday, the airline disclosed an updated agreement with Boeing. Southwest Airlines now expects to receive just 35 Boeing 737 MAX 8s through the end of 2021. That will leave it with about 747 aircraft in its fleet at the end of next year, in line with its fleet count a year ago. The first seven of those deliveries should come this month, with the remainder arriving in 2021.

Deferring 13 737 MAX deliveries out of 2021 is a relatively small change. That said, Southwest Airlines has arguably the best balance sheet in the airline industry and has been aggressively adding new cities to its route network in recent months. Moreover, the availability of highly effective COVID-19 vaccines ought to bolster demand by the second half of 2021. If Southwest Airlines is trimming its fleet plan despite those positive factors, it doesn't bode well for Boeing's efforts to work down its inventory of about 450 stored 737 MAX jets.

Who doesn't love free?

Adding insult to injury for Boeing, Southwest Airlines said that it expects aircraft capital spending to be "immaterial" in the fourth quarter of 2020 and 2021. In other words, the low-fare airline will fork over little or no cash for the 19 aircraft it is buying from Boeing directly over this period. (Southwest is leasing the other 16 737 MAX jets scheduled to arrive by the end of 2021.) Predelivery payments that the airline already made and delivery credits compensating Southwest for the cost of the 737 MAX grounding are covering the purchase price.

To some extent, this shouldn't be surprising. Over the past two years, Boeing has booked about $9 billion of estimated customer concessions to cover costs and lost profits related to the 737 MAX grounding. As of Sept. 30, it had a remaining liability of $6 billion for these customer concessions.

That said, Boeing had already made $828 million of cash payments to Southwest Airlines as part of an initial compensation package. Apparently, that didn't come close to satisfying the full liability. Furthermore, Southwest's ability to "buy" 19 737 MAX jets with no incremental cash outlay highlights why Boeing is on pace to continue burning cash in 2021, adding to its balance sheet woes.

More pain ahead for Boeing

Boeing stock has rallied in recent months on growing optimism that the dual crises of the 737 MAX grounding and the pandemic are ending. Yet while air travel demand will start to recover in 2021, it will remain very low compared to the past few years, weighing heavily on Boeing's aircraft deliveries -- and its cash flow.

As of Sept. 30, Boeing had over $28 billion of cash and investments, so it's not in any danger of running out of cash. (It issued another $4.9 billion of debt last month, bolstering its liquidity.) However, it will take years for the company to repair its balance sheet. In the meantime, it will incur elevated interest expense and won't be able to distribute much cash to shareholders. Boeing is also diluting shareholders' interests by contributing stock to its retirement plans and making stock grants to most employees this month in lieu of raises.

Aircraft demand certainly won't stay at today's negligible levels for very long. Nevertheless, the latest update from Southwest doesn't inspire confidence about Boeing's ability to make a full recovery anytime soon.