Southwest – Has Boeing Screwed its Best Customer? |

Boeing announced that it will not be seeking an exemption for a known safety issue on the 737 MAX 7. Instead, Boeing plans to certify the aircraft with a permanent fix. That fix, however, is planned to be completed in 2026. Southwest eliminated the MAX 7 from its 2024 plans, and may need to push the aircraft out further into 2026, when Boeing had planned the fix that must be retrofit to the entire MAX fleet.Interestingly, Boeing has not indicated the fate for the proposed 737 MAX 10 waiver, for which a request will apparently continue to go forward. It will certainly be interesting to see whether Boeing’s Washington lobby can defeat Congressional critics in approving an exemption . While there is a possibility that Boeing may pull back that exemption as well, we would have expected both the pulled simultaneously. The MAX 10 has more orders than the MAX 7, with a higher price and margin, so it contributes more to Boeing's cash flow. While we hope Congress does the right thing and fails to grant another exemption for Boeing, we believe the old adage applies here: “if pro is the opposite of con, progress is the opposite of Congress.” Southwest is Curbing Growth Plans Southwest is by far the largest customer for the 737 MAX, and has 305 firm orders for the MAX 7 to replace its existing 737-700NGs. The MAX 7 is already late, as the original schedule for certification was missed and has been further delayed as the FAA tightened certification requirements in the wake of the two fatal MAX 8 crashes. Boeing expected certification of the aircraft in late 2023, moved to early 2024, but now in the wake of the MAX 9 issues and the decision to not request a waiver, pushed the certification to late 2025 at the earliest and most likely mid 2026 for initial deliveries.The company deleted the MAX 7 from 2024 fleet plans and will likely need to do that for 2025 as well. The implications for Southwest are far reaching. First, to continue to maintain its market share, Southwest needs lift to replace the older 737-700s that were delivered more than 20 years ago. The age of these aircraft is such that a decision to keep them in service, rather than retire them, requires a major maintenance check. These checks are expensive, and airlines typically would like to reap an additional five years of service from this expense. Keeping older aircraft in the fleet means lower fuel efficiency, as the new models are 15% better. That not only drops to the bottom line, but also impacts the environmental impacts for the airline. Older 737s have a tendency to crack. Southwest typically flies these aircraft on under 700 mile legs, with up to seven flights per day. Which means these 700NGs have been worked hard with thousands of cycles. The chart illustrates the average stage length for Southwest's fleet from 2018. [caption id="attachment_81082" align="aligncenter" width="571"] AirInsight; DoT T-2[/caption] The alternative to maintaining older aircraft for additional service life is to take newer larger aircraft. The problem is that Southwest has many routes that don’t need an aircraft as large as the MAX 8, which really doesn’t fit many markets that helped build the airline. In addition, it takes more time to turn the larger MAX 8 compared to the -700NG. This means expensive additional time needed for planing and deplaning passengers and baggage handling. The result is lower utilization with the larger model, and Southwest seeing its CASM rise. US DoT 2023 data guide to Southwest flights cost $70.55 per minute and, crucially, a delay minute cost $91 per minute. So when we talk about the cost, one can see how quickly this adds up with a fleet of 817 and 23.2% of flights arriving 15 minutes or more late. When an airline uses an aircraft that are too large for a route, it either reduces fares to try and fill the aircraft, or maintain yields and run lower load factors. Neither approach is optimal. We’re now seeing $39 ads for Southwest flights for the current winter season, down from the $49 and $59 and $79 ads we’ve seen over the last couple of years. While the market is strong overall, with demand exceeding supply in many markets, Southwest isn’t finding that true for many of the smaller markets it pioneered. Demand seasonality has returned, and the low demand months will find the MAX 8 too big for many markets. Southwest has been taking delivery of a new MAX 8 every four days. Without the MAX 7, what is Southwest to do? They can’t quickly acquire another aircraft type, as order books for the similarly sized Airbus A220-300 and smaller Embraer E195-E2 are full, although Embraer might be in a better position as a smaller substitute for the MAX 7. But there really isn’t a true one to one replacement for the 737-700.The Bottom LineSouthwest's strategy of a single aircraft type never considered the possibility of design and quality meltdowns at Boeing. Nonetheless, it has occurred, and now presents Southwest with unappealing alternatives. Southwest can remain with Boeing and likely not see the aircraft it really needs for two years, added to the already existing delays. Or Southwest can change its single aircraft strategy, introducing a new aircraft type into its fleet, with the concomitant increases in fixed costs and the requirement of “critical mass” for the new fleet to remain cost competitive. The problem is neither of these strategies produces the win that Southwest needs. Remaining with Boeing requires taking more MAX 8s that don’t fit Southwest’s route structure and demand patterns. That means lower financial performance for Southwest, and its shareholders. The other alternative may be truly infeasible, given the sold out order books for competing types. Implementation also requires higher overheads and transitioning to a new aircraft, with high training costs for pilots, mechanics, ground handlers and other personnel.Somehow, Boeing’s problems have coalesced to effectively ruin the financial performance and growth plans of its single largest customer. Southwest has effectively been screwed by the vendor it has stood strongly by since its founding.

US Flight Planner - US DoT On-Time Data	Airbus vs Boeing - Official OEM Data
US Airline Schedule Performance - US DoT Data	Daily OEM Production & Deliveries -

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