DALLAS — Confirming reports earlier this month, Southwest Airlines said Monday it is expanding its all-Boeing fleet with an order for 100 MAX jets instead of buying planes from Europe’s Airbus.
Southwest ordered the 150-seat 737 MAX 7 and expects the first 30 to show up next year. It is also converting orders for 70 MAX 8s to the smaller model.
The news is a boost for the troubled jet program and for the workforce in Renton that builds it. Boeing has now announced about 270 orders and commitments for the MAX since December, including deals with United, Alaska, Ryanair and other airlines.
The Dallas-based Southwest publicly mused about buying the Airbus A220 instead, sending executives on a scouting trip to Europe. It would have been a huge blow to Boeing — in money and pride — if Southwest, its biggest customer, had gone with Airbus. However, CEO Gary Kelly said sticking with Boeing “was our preference all along.”
Financial terms of the deal were not announced, but Southwest made clear Boeing offered it a tremendous bargain to keep Airbus out.
Aircraft-valuation firm Avitas estimates the typical discounted price of a MAX 7 at about $36 million. However, in this case, given the importance of Southwest as a MAX customer and the compensation Boeing owes the airline for delayed MAX deliveries and the nearly two-year grounding of its MAX fleet, the discount was much bigger than normal.
Southwest estimated Monday that for the years 2021 through 2026, it will spend approximately $5.1 billion on 169 MAX firm orders, consisting of 135 of the MAX 7s and 34 of the larger MAX 8s. That’s an average price of slightly more than $30 million each — although it doesn’t include the advance payments the airline already made to Boeing for MAX aircraft not yet delivered.
Southwest’s cash outlay this year and next will be especially low because its previous advance payments cover the MAXs to be delivered in that period. With that taken into account, plus the compensation credits provided by Boeing to settle estimated damages, Southwest said it will have to pay out just over $23 million per airplane for 30 planned deliveries in 2022.
Though Southwest took a hard look at the Airbus A220, which would have delivered better economics per trip, the Boeing discounts and compensation credits swung the deal. Bainbridge Island-based aviation analyst Scott Hamilton wrote on his Leeham.net news site that “There was no way Airbus could match the financial terms.”
The new MAX 7s eventually will replace Southwest’s aging fleet of 143-seat Boeing 737-700s while providing better fuel mileage.
Southwest is also taking options for 155 more jets, both MAX 7s and 8s. Combined with past orders, Southwest is therefore in line to take more than 600 MAXs through 2031.
Kelly said Monday’s announcement came on the 50th anniversary of the airline’s agreement with Boeing for its first three planes. Most big airlines operate several plane models from more than one manufacturer, but Southwest has turned its reliance on the 737 into an advantage, simplifying maintenance and pilot training and scheduling.
That loyalty was put to the test, however, when the MAX was grounded worldwide in March 2019 after two crashes that killed 346 people. The grounding forced Southwest and other airlines to cancel thousands of flights in all. Last year, Southwest disclosed that it received $428 million in initial compensation from Boeing.
Regulators in the United States, Europe, Canada, Brazil and other countries cleared the plane to resume flying after Boeing changed an automated flight-control system that played a role in the crashes. Southwest resumed passenger flights with its MAX 8 jets on March 11. American and United already had resumed MAX flights, and Alaska Airlines began using the plane too.
Earlier this month, Boeing reported its first positive net orders for commercial airplanes in 15 months. The orders could indicate that airlines are starting to feel more optimistic about a rebound in travel, which has been devastated by the coronavirus pandemic.
Boeing shares rose 2.3% Monday and helped the Dow Jones Industrial Average close with a gain of 98 points, or 0.3%.