Southwest Airlines Discusses MAX8 Return in Earnings Call

News Southwest airlines held its earnings call yesterday, and of course one of the topics was the MAX8 and how Southwest will deal with bringing the aircraft back into service. CEO Gary Kelly indicated that he expected operations to be back to normal by the third quarter, and beginning of the fourth quarter at the latest. He also addressed concerns with passengers, that Southwest and Boeing are each planning campaigns regarding the safety of the MAX aircraft, and that their fleet plan, despite a recent meeting at Airbus, remains centered around the MAX. Analysis Southwest is the world’s most experienced 737 operator, with an all 737 fleet and the largest US-based fleet of 737MAX aircraft. The grounding is impacting about 4% of the airlines schedule. Kelly indicated that adjusting the schedule through August 5th was the most efficient way to handle the grounding, that maintenance of their 34 aircraft will take place in Victorville where the planes are stored in the California desert. “Getting all 34 aircraft to relaunch and back in service is expected to take a month or so” according to Michael Van de Ven, Southwest’s COO. With respect to simulator pilot training for the MAX, Kelly indicated “at this point, we’re not hearing that it will be a requirement. I just go back to (the fact that) we are the most experienced 737 operator in the world, and our pilots are extensively trained… we will do whatever we have to do here, but we’re obviously awaiting the Boeing service bulletin as well as the FAA airworthiness directive to know exactly what we’ll have to do.” From a marketing perspective, when asked about booking away from the MAX, Tom Nealon, their President, said “I think everyone’s asking the same question. There’s just so much media and coverage on the topic that everyone’s got an opinion, and I think that certainly some peope I expect would probably book away for some period of time.” He also indicate that Southwest is doing a lot of work between their marketing and communications teams to understand customer perceptions, their understanding of the issues, and how to address their concerns. With respect to the Airbus visit, Kelly indicated that knowledge about the visit was leaked and that the timing was unfortunate given the situation at Boeing, but Southwest, like all airlines, looks at alternatives in its fleet planning process and maintains relationships with all of the manufacturers. But this does not mean Southwest is changing its current fleet strategy, and the company fully expects to take its MAX orders as quickly as possible to restore planned schedule growth. Insight Southwest is an all 737 airline, and is reflecting confidence in the MAX and a timely restoration of service in late summer without the need for additional simulator training by pilots. They have cancelled MAX operations through August 5th, and would need about a month to bring the planes back on line. That would require a clearance from the FAA around the first of July for everything to go smoothly. They remain confident that the MAX is the right airplane for their fleet, particularly for their new Hawaiian routes where seats need to be blocked on the -800 to provide adequate range. The initial operations on the new routes are meeting or exceeding operations, and Southwest is seeing strong demand that it believes would overcome any lingering customer perception issues with the MAX. From a performance standpoint, Southwest is having a good year, rather than a great year, from the MAX groundings, but expects a positive outcome from the regulatory reviews and a timely restoration into service for the MAX. The visit to Airbus, while untimely for Boeing, does provide Southwest with some potential leverage. Nonetheless, the historic relationship between Southwest and Boeing is quite strong, with Southwest on occasion adjusting its skyline to support Boeing, and taking advantage of opportunities that might arise when Boeing has a schedule adjustment. There are few tighter relationships in the industry, and we do not foresee a breakdown or change in strategy in the near term. The bottom line is that Southwest is continuing to perform well, and is hearing positive things about the MAX return to service.

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