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Why Is Southwest Airlines Offering to Pay Boeing an Extra Half-Billion Dollars?

By Rich Smith – May 18, 2015 at 2:07PM

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Better economics for Southwest equal better sales numbers for Boeing.

Boeing's (NYSE: BA) Thursday update on plane orders received from its customers was a bit of a letdown -- just one new order, for a single 787 Dreamliner, booked in the past week.

And that's OK.

Sure, Boeing's order book has grown by just one plane. True, it now stands at only 129 orders "net" of cancellations. And yes, that's fewer than half the orders Boeing had received by this time, last year. But that doesn't mean Boeing isn't raking in money hand over fist.

In fact, the value of its orders just jumped by nearly $500 million.


Southwest loves Boeing's 737 airliner, and loves the bigger ones even better. Photo: Boeing.

Sometimes, bigger is better
For this, you can thank the good folks at Southwest Airlines (NYSE: LUV), who last week confirmed that they are trading in their entire slate of 31 Boeing 737-700 orders for larger, pricier 737-800 aircraft instead.

As reported by Bloomberg last week, Southwest is increasing the number of flights it runs to Mexico, Central America, and the Caribbean, and wants larger planes to work these routes. Aviation News gets even more specific, saying that as soon as mid-October, Southwest will be connecting to Cancun, Mexico City, Puerto Vallarta and Los Cabos in Mexico, and to Belize City, Belize, and San Jose, Costa Rica as well. One month later, Southwest will shift its focus farther south and also to the east, adding routes to Liberia, Costa Rica, and Montego Bay, Jamaica. Each of these routes will connect through Houston, Texas.

Currently, two-thirds of Southwest's fleet is composed of 737-700 jets. But compared to the 737-700, the 737-800 is bigger, and Southwest can fit additional 32 seats onto each plane by changing over its orders to the larger aircraft. According to Southwest Chief Executive Officer Gary Kelly, these new planes will generate "nice economic benefits" for the airline when filled to capacity and flown on the new southern routes.

How to make money selling airplanes... without selling more airplanes
It's pretty nice news for Boeing as well. According to the planemaker's website,  the list price on a 737-800 is $93.3 million -- fully $15 million higher than the price of a 737-700. Times 31 upgraded aircraft orders, Southwest's switch promises to deliver an extra $465 million in revenue for Boeing, without Boeing having to add a single plane to its order book.

Of course, if you do add the value of last week's single seven-eight-seven sale to TUI Travel PLC (which, according to S&P Capital IQ is the British subsidiary of German tourism company TUI),  Boeing's tally for last week rises even higher. At a list price of $218 million, a Boeing 787-8 (for example) would lift Boeing's new revenues, announced last week, closer to $700 million.

And at Boeing's 10.7% operating profit margin, that could translates into as much as $73 million in extra profit.

"Nice economic benefits" indeed -- and not just for Southwest.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 353 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. 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.

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