Southwest Adds Boeing MAX in Record $19 Billion Jet Order

Southwest Airlines Co. (LUV) agreed to buy 208 Boeing Co. (BA) 737 jets with a list value of $19 billion, the largest aircraft order ever and the first to include the more fuel-efficient MAX model.

The MAX accounts for 150 of the jets in the deal, which includes options for 150 more, Southwest said today. It didn’t say which MAX version it will take from a family of planes that Boeing said will range in price from $77.7 million to $101.7 million. Airlines typically negotiate discounts.

Upgraded engines on the MAX are supposed to help cut fuel use as much as 12 percent compared with the current 737, Boeing says. The Chicago-based planemaker said in July it would offer the plane after European manufacturer Airbus SAS decided in December to equip its rival A320 with new engines.

“Southwest has done everything they can to lower costs on operations and on labor, so it comes down to equipment and technology and fuel savings,” said Richard Aboulafia, vice president of consultant Teal Group in Fairfax, Virginia. “It’s a very strong endorsement for the MAX.”

Deliveries will start in 2017. The order eclipsed Airbus’s record of 200 planes from AirAsia Bhd in June. Some larger aircraft transactions announced this year, such as American Airlines’ plan to buy 460 jets split between Airbus and Boeing, haven’t had firm orders logged for all of the planes involved.

Boeing was unchanged at $70.90 at 4:03 p.m. in New York, while Southwest dropped 3.2 percent to $8.16.

Largest Operator

Buying 737s extends Southwest’s status as the world’s largest operator of the plane and its commitment to flying only Boeing aircraft. It is the fourth time Southwest has served as the initial customer for a version of the 737, the most widely flown jetliner.

The purchase represents a new fleet plan for Southwest, which now will accelerate the retirement of its oldest aircraft and shed smaller Boeing 717s it acquired along with AirTran Holdings Inc. in May, Chief Executive Officer Gary Kelly said at Southwest’s Dallas headquarters.

“One of the main challenges we face is high fuel costs, and we are very much in need of new technology to reduce fuel burn,” said Kelly. Today’s aircraft order was the first of his tenure as CEO dating to 2004.

The 737 MAX will reduce fuel burn as much as 18 percent compared with Southwest’s oldest planes, and as much as 11 percent compared with 737-800 NGs, Southwest Chief Operating Officer Mike Van de Ven said. The plane will have operating costs 7 percent less than the competition, Southwest said.

‘Early Believer’

Engine efficiency is important to Southwest, because fuel spending has surpassed labor to become the carrier’s largest cost after a 59 percent jump in prices over five years. Kelly warned employees earlier this month that the carrier was facing increased pressure to cut operating expenses because its cost advantage over peers had narrowed.

“They were an early believer that fuel prices were going to stay high,” James M. Higgins, an analyst at New York-based Ticonderoga Securities LLC, said in an interview. “This really reflects that philosophy. They seem very sensitive to the fuel- price environment.”

Southwest’s firm orders for Boeing aircraft grew to 350 from 142 with today’s addition, and deliveries are scheduled through 2022. The 350 planes represent about $1.2 billion a year in capital spending, Van de Ven said. Southwest plans to hold its fleet size constant at least through 2014, retiring the same number of planes that it adds annually, Kelly said.

The airline said it was too early to say how the planes will be financed. Southwest also now holds 242 options for additional aircraft that would be delivered from 2014 through 2027.

Larger Discounts

Being first to place a MAX order probably won Southwest larger discounts and the planes will help hold down operating costs, said Will Randow, a Citigroup Inc. analyst who recommends buying the shares. Still, the carrier might have been better off with a smaller order since it’s not reaching targets for return on invested capital, he said.

“Maybe 20 to 25 new aircraft per year versus the 35 they are looking to do may have made more sense,” Randow said.

Except for 88 Boeing 717s, Southwest’s fleet of 700 jets consists entirely of 737s. Southwest is working with Boeing on terms to return the 717s before their leases expire in 2018 through 2024, Van de Ven said.

The new jets will carry engines valued at $4.7 billion from CFM International, a partnership of General Electric Co. (GE) and France’s Safran SA (SAF) and the exclusive engine provider for the 737.

Boeing Strategy

Boeing originally said it preferred developing an all-new successor for the single-aisle jet to upgrading its engines. The planemaker, still grappling with a production system for the new jet, switched course after orders for Airbus’s A320 upgrade, the neo, surged and airlines such as Southwest pushed for faster fuel-efficiency gains.

Boeing announced its strategy in July, when American included the new jet in an agreement to buy 460 single-aisle planes, including 260 A320s and 200 737s. Half of the 737s will be MAX models.

Including Southwest’s order, “there are now 900-plus orders/commitments for the MAX,” Jason Gursky, a Citigroup analyst in San Francisco, said in a note to clients. “With the specs nailed down, we expect to see more of the 750-plus remaining commitments begin to turn into orders.”

Boeing could “easily” have 1,400 to 1,500 firm commitments for MAX aircraft by the end of 2012, said Jim Albaugh, head of Boeing’s commercial planes division. He described the planemaker’s relationship with Southwest as “special,” and said the airline has a strong association with the 737.

“Gary and I have talked a little bit in the course of negotiations," Albaugh said, referring to Southwest’s Kelly. ‘‘Gary’s message to me was a pretty simple one. He said, ‘Make sure that I get the most capable airplane available.’"

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in New York at mcredeur@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.