This past week we were part of Media Day at Southwest Airlines. It was a most pleasant visit. However, news reports coming out of the event bear some scrutiny.
Item 1 – Bob Scheler from Dow Jones reported: “Southwest Airlines Chief Executive Gary Kelly said he wants Boeing Co. to re-engine the 737 for better fuel efficiency, voicing skepticism Boeing will produce a timely replacement for the workhorse aircraft.
“Fuel prices are a game-changer,” Kelly said in an interview after the company’s media day event at its headquarters. “We need a more fuel-efficient, cost-effective airplane.”
He called Boeing “a very fine partner” but said Southwest eventually might be forced to consider competitors’ offerings if it isn’t satisfied with its options.
“If Boeing doesn’t have a solution, we will have to think about that,” Kelly said. “But at this time, we’re not talking to anyone” else.
Kelly said Boeing has told Southwest that is assessing plans for a 737 replacement but hasn’t been precise on the timing. He described himself as “skeptical” regardless, because “we’ve been talking to them for years” with no firm replacement plans.”
Item #2 – Lori Ranson from ATI reported: “Southwest Airlines believes re-engining of existing narrow-bodies is fast becoming the only option for airlines looking for a 15% cost benefit as fresh narrow-body designs will not emerge until after 2020.
“I think what is going to happen is that the decision is almost going to be made for us,” Southwest executive vice president of strategy and planning Bob Jordan tells ATI. “We’re 12 or more years away [from a new narrow-body design], and we cant’ wait that long for a step change in aircraft costs.”
Jordan says if a re-engined option emerges much sooner that creates a significant cost benefit, “what happens is you de facto end up with a decision because it is the only option in any reasonable amount of time”.
He says Southwest hasn’t made a firm decision on re-engining, but “personally I would be very surprised if re-engining isn’t the option we pursue”.
Jordan also believes manufacturers need to commit to the 12%-15% step change in efficiency a re-engined narrow-body could deliver. ““Boeing is a fantastic partner, but we need both our engine manufacturer GE and Boeing to step up and take the lead.”
Item #3 – We had an interview with Mike Van de Ven (Southwest’s EVP and COO) which provided another view. It was clear from our conversation he echoed the Southwest view that their relationship with Boeing is 39 years old and is very important. He went on to provide some context to an earlier interview he had given to Bloomberg. In our conversation he clarified that waiting until 2025 was not an option, he feels that the airline needs a solution “sometime before 2020”. We pressed on to confirm that Southwest is looking for a “step change”. He said that the airline needs better economics and an airplane is a good way to get these better economics. Consistent with his colleagues, he expressed a concern with fuel prices. He feels they cannot wait 15 years for the step change. He pointed out that post the AirTran acquisition, with 684 planes, they cannot flip the fleet quickly. For a new airplane he “would dream big” – and look for a 20% to 25% improvement in ownership costs.
He then went on to point out that in a higher fuel cost environment, flying smaller gauge airplanes becomes more difficult. Southwest’s business model is built on frequency. The airplane they would look at is “around 120 to 150 seats”. He also pointed out that as the airline evolves so will the fleet strategy. But looking forward at “lower tier markets” and “slot controlled markets” there appears to be room for a mixed fleet. He mentioned that if he had “50 or a 100 – of a type” you can get efficiencies. He then said they will try to make the 717s work, and he thinks the leases on the (AirTran) planes run through 2024. So Southwest could be operating the 717s for more than a decade yet.
This led to talking about the CSeries which he called “an interesting airplane”. “If it executes as it’s marketed, it’s a nice airplane.” He likes the numbers. He thinks it is an option for Southwest. He immediately added that this is what they are asking Boeing – “what are the options?” He said that Southwest and Boeing’s thinking are “very much aligned.” This again is consistent with his colleagues.
He described the CSeries and C919 as “a little bit disruptive.” When asked directly if Southwest would consider something other than a Boeing product, he responded Boeing has “been a great partner” and the preference is to first hear what Boeing has to say. He wants to hear what Boeing will say about a replacement or a re-engine.
So now what?
From these three interviews with senior executives what we are hearing consistently is that Southwest is strongly Boeing oriented. That means that whatever Boeing has to offer will be given a sympathetic ear. Clearly the airline and OEM have deep relationships. It is useful to point out that speakers at the Media Day event said the same thing in many different ways; but it was consistent. This airline is focused on relationships – among employees, with customers and vendors. It is a significant cultural thing for Southwest.
Here are some key drivers we know of the airline’s fleet desire:
- Southwest has a “sweet spot” at around 149 seats. One more seat means another flight attendant and more cost.
- They want an airplane that can do lots of daily cycles. Frequent daily service in every market is their modus operandi.
- They are looking for 20% minimum improvement in costs.
Will Southwest ever look at Airbus seriously? Assuming Boeing has nothing to offer in time and Airbus offers the NEO, there could be a credible offering. We heard a great story while visiting about legendary Herb Kelleher contacting Airbus every few years to ask for 20 cigarette lighters. These lighters were then handed out to the visiting Boeing sales team at the start of negotiations. (It would seem fair to think of Ryanair in the same light. Between Southwest and Ryanair, they are both Boeing dependent.)
At the same time Southwest has to be aware that Boeing’s Jim Albuagh has remarked that the sweet spot for the 737 is now 180 seats, or nearly the size of the 737-900. This way bigger than Southwest is considering. There is likely to be Southwest order for 737-800s by December 2010, though. But that airplane has specific uses; slot-constrained airports and Hawaii. So while outside Southwest’s sweet spot, there are specific requirements. As the airline has grown its fleet has to evolve beyond its standard to date.
Boeing has so far made it clear that it does not like the idea of re-engining the 737. But Southwest likes this idea as a near-term solution. Consider this a small opportunity for change. Next Boeing has made numerous statements that a 737 replacement is likely to come after 2019-2020. Southwest does not (and perhaps will not) wait that long. And CEO Gary Kelly expressed his doubts about that as seen above. Consider this another small opportunity for change.
What is clear from the people who visited Southwest Airlines last week is that the airline is looking at Boeing for ideas and a solution. It has been quite vocal about what it is looking for. The next “buy” will be for 737-800s and this will occur very soon. But, even with its loyalty to Boeing, based on nearly four decades of relationships, Southwest Airlines wants and needs a broader fleet solution before 2020. Is Boeing going to blink?
Unlike Southwest, which is manifestly Boeing’s customer to lose, we think Ryanair will mercilessly shop its fleet needs. If either of these two airlines decide to buy something else than a Boeing product the knock on effects will be significant.