Southwest Airlines continues its buying-mood by adding more Boeing MAX 7s to its fleet. During the third quarter, the carrier exercised options on eight aircraft for delivery in 2022 while on the first day of Q4 on October 1, it did the same for another eight for delivery in 2023, it said in its Q3-results. More firm orders are likely this year, as Southwest is not done yet with MAX orders.
After previous conversions, the low-cost airline has now 399 MAX on firm order, including 250 -7s and 149 -8s, with options on 252 for both models through 2031. This could become even more, as Southwest says it is evaluating the exercise of 42 options that remain for 2022 “as decision deadlines occur.”
More than half of the new aircraft are expected to replace its fleet of 461 737-700s until now and 2035. For 2022, the delivery schedule includes 72 MAX 7s. The return to service of the MAX had a positive effect on fuel efficiency, which was 5.1 percent better in Q3 over last year.
Southwest recorded a $446 million profit in Q3 compared to a $1.157 billion loss last year. The operating profit was $733 million versus $-1.411 billion. Total revenues improved by 161 percent to $4.679 billion, of which $4.227 billion was coming from passengers and $47 million from freight. It is the second profitable quarter after Q2.
CEO Gary Kelly admits that Q3 was “a challenge for us, operationally.” Year on year, capacity was 46.4 percent higher. The airline had planned to operate close to 2019 capacity levels but this proved to be a step too far, as its active and available staffing fell below plan. Remember this was before the fourth quarter, October 9-10 ‘meltdown’, when Southwest was forced to cancel some 1.800 flights because of weather, air traffic management, and staffing issues. The operational issues in Q3 cost Southwest $135 million, excluding special items.
Capacity reduced for Q4 and Q1
To prevent such problems from happening again, Southwest is hiring 5.000 staff before the end of this year. Halfway of this target has been accommodated, but the carrier is taking a conservative approach to next year’s schedule with a six percent capacity decrease included for Q1. “Our 2022 capacity planning reflects more conservative staffing assumptions, as well, all compared to historical norms”, said Kelly. Capacity for October has been trimmed to +68 percent higher year-on-year from 73 percent, while November and December will see +42 and +55 percent respectively.
The nightmare scenario of Q3 and the October weekend means that Southwest must look cautiously to the pent-up demand expected for Q4. The cancelations and higher Covid-rates are seen in reduced bookings and translated into $300 million lower revenues in August and September and $100 million in October. But the airline notices a renewed momentum in leisure and business traffic. Bookings for the holiday season are already picking up. While this looks promising, the higher fuel prices will negatively impact Q4 earnings.
Southwest ended the quarter with $16 billion in cash and short-term investments while having a $1.0 billion revolving credit facility at its disposal. Current and non-current obligations stand at $11.2 billion.