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I published this analysis earlier today on GLG News, and have reproduced it here for our readers.

Southwest’s acquisition of AirTran provides several benefits, including international service, more modern information technology, and a major hub operation in Atlanta. It also brings up the question of fleet growth, and Boeing’s strategy to counteract the Airbus A320 NEO which is expected in mid-October.

Prior to the acquisition of AirTran, Southwest indicated that it is examining the Boeing 737-800 for potential addition to its fleet, and that it had obtained the approval of its pilots and flight attendants for such a move. With the acquisition of Air Tran, also a major 737 operator, that becomes more likely.

Post acquisition, Southwest will operate 487 737-700s, 173 737-300s, and 25 737-500s, in addition to 86 717s. With an average age of under 10 years, Southwest’s fleet will be fairly young, but also include a significant number of aircraft that will need replacement for economic reasons over the next few years. In particular, the 737-300s and 737-500s are significantly less fuel efficient than the -700, and will be more than 20% less fuel efficient than the PW1000G powered CSeries from Bombardier when introduced in 2013.

AirTran’s fleet of 86 Boeing 717s, 55% of the 156 built, are relatively young aircraft and fit a market niche. More importantly, that fleet is leased to AirTran by Boeing, and Southwest will almost certainly utilize its leverage as Boeing’s largest narrow-body customer to re-negotiate more favorable lease rates for those aircraft, particularly give the dramatic operating cost differential it will face once the CSeries comes into service.

Southwest adding the 737-800 would confirm that Boeing plans only minor improvements that yield 3-4% operating cost improvements to the 737 while it waits for a new technology replacement. Boeing faces decisions on both the 777, which faces stiff competition from the A350XWB (and is also Boeing’s highest margin aircraft) as well as competition from the re-engined Airbus NEO, Bombardier CSeries, Embraer ESeries+, Comac C919 and Irkut MS-21 in the narrow-body regime.

In evaluating whether to attack a market with one competitor or five, I would focus on the wide body market in the near term, and wait to see if unducted fan technologies promised by GE and Rolls Royce become feasible before committing to an all new narrow-body aircraft. If the new technology works, the design can move in one directions, and if it doesn’t, the PW GTF promised continued growth in efficiency to near UDF levels over the next decade.

If Boeing were to launch a new technology narrow body into the market soon , Southwest would be unlikely to acquire the 737-800, as that would result in the aircraft becoming economically obsolete within a decade when compared with an all new technology alternative promising 20% operating cost improvements, which it would need to beat the CSeries.

Bottom Line: Southwest moving forward with the 737-800 means Boeing won’t likely have a 737 replacement until the 2020 timeframe, and that Boeing will wait for new engine technology from GE, RR and PW before making its decision.

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