Southwest Airlines' 'Bet-the-Company Decision:' Should it stick with Boeing's 737?

Southwest Airlines’ looming decision on its commitment to Boeing’s 737 jet isn’t getting any easier.

As nearly 700 of Boeing’s 737 Max planes sit idle, the challenges to getting it back in the air keep piling up, including software glitches, wiring harnesses and questions about pilot training requirements. Boeing estimates the plane won’t be certified to fly again until mid-2020. With another two or three months for pilots and maintenance, it will likely be at least 18 months since Southwest last had those planes available for peak travel seasons.

When the Max does return to the skies, that’s when analysts say Southwest will have to make the most important decision it’s faced in decades — whether to move on from its unwavering loyalty to the 737.

“These are bet-the-company decisions,” said Robert Mann, an airline consultant with R.W. Mann and Co. “When you have a company that is so heavily invested and admittedly undiversified by operating a single fleet, you have risk.”

Southwest CEO Gary Kelly said the company won’t look at its fleet strategy until after the 737 Max is ungrounded. He promised an earnest look at whether the Dallas-based airline should stick with just one type of plane, fly only Boeing planes or even look at buying from a different plane supplier.

Those who watch Southwest closely say choosing a new airplane type could be a daunting task for the company. It could take Airbus or Boeing years to deliver new planes based on long order backlogs at each. Then Southwest would have to undertake massive internal changes to revamp its business model built on point-to-point flying with interchangeable planes.

Southwest outlined exactly how tough (and expensive), the prospects of shifting away from the 737 could be in a regulatory filing earlier this month.

“The requirements associated with operating a new aircraft make and model could take an extended period of time to fulfill and would likely impose substantial costs on the company,” said the filing. “A shift away from a single fleet type could also add complexity to the company’s operations, present operational and compliance risks, and materially increase the company’s costs.”

But Southwest is paying the price now for its reliance on Boeing’s jets with more than 10% of its fleet out of service, a move that cost it $828 million in operating profits in 2019 and more than a hundred flights a day every day since the plane was grounded in March. It’s not counting on getting the Max back until at least Aug. 10 — a return date contingent on events out of its control.

Southwest Airlines has 34 Boeing 737 Max jets sitting in storage in Victorville, Calif., and another 27 Boeing owes the airline parked throughout the Pacific Northwest. Then there are 51 more 737 Max jets that Southwest expected to receive this year and a contract for 187 orders through 2026, along with purchase options for 131 more.

“But if you think as a practical matter you will already have the 737 Max back and it will have millions of miles of service by then, at that point you might not want to switch,” Mann said.

The single-type fleet

Southwest Airlines got its start in 1966 when Herb Kelleher sketched his Texas triangle route map on a napkin, but the concept didn’t become reality until Kelleher struck a deal with Seattle airplane maker Boeing for three 737-200 airplanes. Boeing gave a loan for 90% of the planes since Southwest had only raised $1.25 million from investors and hadn’t flown a single passenger.

Southwest has flown the 737 almost exclusively since then, briefly dabbling with the cousin 727 planes between 1979 and 1985. When Southwest received its first order of 737-300 jets in 1984, it threw a blowout gala in Dallas featuring comedian Bob Hope and sound-barrier pioneer Chuck Yeager.

The 737 became a symbol of Southwest’s counter-culture, yet stick-to-the-basics philosophy. While other airlines flew across oceans, focused on major hubs and split customers by class, Southwest stuck with one plane, one passenger class and until recently didn’t fly over any oceans. Southwest has been profitable for 47 consecutive years flying the 737.

“For a half-century, this has been the most successful airline in the history of the world,” said Seth Kaplan, a transportation industry analyst and founding editor of Airline Weekly. “Southwest has made a major part of their corporate strategy having just one fleet type.”

The looming decisions

Southwest has faced decisions over its fleet before. When it bought rival AirTran in 2010 for $1.4 billion, it inherited 86 Boeing 717 jets, but quickly opted to lease those jets out to Delta Air Lines and merge AirTran’s 737 planes into its own fleet.

Around that time, Kelly said, Southwest looked at Boeing alternatives such as Airbus, but opted to stick with Boeing and its popular 737.

The 737, which carries 150 to 200 passengers depending on the variation, is a narrow-body, single-aisle jet that has long been a favorite of airlines for point-to-point domestic flying to medium-sized destinations. The Max variation -- with bigger engines, more seating and redesigned cabins -- was designed to be more fuel-efficient and environmentally friendly than its predecessor 737 Classic and 737 NG models. It was the plan built to take Southwest into the 21st century.

The 737 logged billions of flight miles for Southwest without a major catastrophe until 2018, when a fan blade broke off on an engine over Pennsylvania, shredded the engine, broke a window and pulled a passenger partially out the window, killing her.

Still, Southwest’s real trouble didn’t start until March 13, 2019, when the FAA and worldwide aviation authorities grounded all 737 Max jets following crashes in Indonesia and Ethiopia that killed 346 people. Those crashes were blamed on a faulty anti-stall software system called MCAS that overcompensated when paired with bad sensors.

Boeing has taken heat for its poor decision making and the FAA has come under scrutiny for how much authority it gave to the manufacturer in certifying the plane. Boeing and airlines initially thought they would be without the 737 Max for a few weeks, but the deepening probe into Boeing and pressure on the FAA to fully vet the manufacturer has stretched it into its 11th month.

“Regardless of the outcome of all of this, Southwest’s relationship with Boeing has forever changed,” Kaplan said.

A new plane for Southwest?

Some analysts have suggested that Southwest could be pressured into buying another airline such as JetBlue or Allegiant to bulk up its fleet almost immediately, a move that Stifel financial analyst Joseph DeNardi warned against.

In a January call with investors and reporters, Southwest’s Kelly shot down the merger and acquisition speculation.

“I do not agree that the MAX crisis compels us to acquire another carrier,” he said. “We would not overpay. We would not commit us to a course that’s inconsistent with our strategy.”

But Southwest’s board of directors is still committed to a review of its fleet strategy after the Max is ungrounded, Kelly said. And Southwest’s options are neither quick or cheap.

“Southwest isn’t a little startup airline anymore,” said George Hamlin, president of Hamlin Aviation Consulting. “Southwest is big enough to operate with more than one type.”

The simplest solution, apart from sticking with the 737, would be to make an order for something in Airbus’ A320 family, which ranges from 100 to 240 seats. American Airlines took delivery of its first A321neo in April.

Then there is Airbus’ A220, a smaller jet with around 100 seats built in partnership with Canada’s Bombardier. The plane has gotten strong reviews and could help Southwest expand to even smaller destinations that couldn’t support a larger 737, Hamlin said. Last year, Delta began flying the A220 nonstop from New York’s LaGuardia Airport to DFW International Airport.

Making a deal with Airbus could put pressure on Boeing, he said.

“Airbus would love to have Southwest as a customer,” Hamlin said. “And a serious look at Airbus would give Southwest some leverage with Boeing.”

Airbus is an attractive alternative and Southwest’s U.S. competitors fly a mixed fleet of Boeing and Airbus planes. But a worldwide boom in flying has made them harder to get. The European multinational has a backlog of more than 6,200 planes that stretches into 2024.

Southwest could also stick with Boeing and diversify into a different aircraft, such as the 787 Dreamliner. The 787-800 is a larger, twin-aisle plane that holds about 250 passengers. It’s popular for cross-country flying and could help Southwest on coast-to-coast flights and its rapidly expanding California to Hawaii service.

Then there is the theoretical 797 Boeing has floated to fill its medium-range demand with a single-aisle plane. However, Boeing’s new CEO David Calhoun has put off any plans for a new jet until the 737 Max problems are resolved.

Transforming the operation

Even adding new types of planes could be a major shift for Southwest’s style, said Richard Aboulafia, vice president of analysis at Teal Group, an aviation and defense intelligence firm.

“They’ve always had an almost extreme emphasis on this commonality thing,” Aboulafia said.

Even though Southwest has flown different variations of the 737 with different engines and different features, the planes can be flown by any 737 pilot since they are under one FAA operating certificate.

With a limited variation in seat size, the 737 can also be swapped out on the fly when one plane needs maintenance or weather problems delay a flight. Parts are similar, too, and the airline’s 2,400 mechanics and contractors have deeper expertise on one plane type.

A new plane would put Southwest in an unfamiliar position beyond its model that has produced nearly 50 years of steady profits.

Aboulafia said Southwest is going to have to face this decision now or in the future. The 737 Max is likely the final variation in the 52-year-old 737 line. The 737 has already shown its weaknesses with upgrades to bigger engines that ultimately made it difficult to fly without correcting software.

“Ten or 15 years from now, it is going to happen,” he said. “The 737 isn’t going to be around forever.”

———

©2020 The Dallas Morning News

Visit The Dallas Morning News at www.dallasnews.com

Distributed by Tribune Content Agency, LLC.