Things in the Sky

Southwest Airlines has once again upped its planned 737-800 deliveries slated for next year, according to the carrier’s third quarter earnings release.

The carrier originally announced in December last year that it would convert 20 orders for 737-700s (to be delivered in 2012) to the 737-800. Then, Southwest noted in it is second quarter earnings the release that it would be receiving five additional -800s in 2012, which would be leased aircraft.

Southwest noted today that it had 28 737-800s on firm order, plus the 5 additional (leased) aircraft. The additional eight firm orders for 737-800s appear to have been offset by changes in the airline’s 737-700 delivery schedule. In the second quarter Southwest said it was expecting six -700s in 2012 followed by 25 in 2013. The company said today that no -700s will arrive in 2012, and only 23 will arrive in 2013.

What’s interesting is that (in my opinion) the changes might be related to Southwest’s acquisition of AirTran’s 737 orderbook. For example, in April Southwest reported that it had no 737-700s on order in 2012 and 19 in 2012. Then, in the second quarter (the first quarter where AirTran’s orders were included) the number of -700 deliveries in both year increased by six, the same number AirTran had on order for those years (as of March 31).

Southwest will be starting its earnings call in a bit later today — and will likely provide some additional detail on its delivery schedule.

The airline has said previously that it could have over 100 737-800s eventually, and noted in its earnings release today (as it has in the past couple of quarters) that it “is evaluating substituting 737-800s in lieu of 737-700 firm orders currently scheduled for 2013 through 2017.”

I realize I’m playing catch-up here, but during Southwest’s quarterly media call earlier this month, CEO Gary Kelly had some interesting comments on the AirTran 717s and that size of aircraft in general:

We have broad discussions underway with Boeing on a number of issues, and at this point we don’t see a reason why we would want to have a different aircraft other than the 737. So, that’s not to say that we don’t want the 717 because we’ve got them, but we don’t see a reason to keep the 717s longer than we have to, or find a unique replacement for the 717 that is anything other than the 737.

Gary also said during the call that it has lease commitments on 717s through 2024.

Those comments made me do a little more digging.

First off, the vast majority (80 of 88, according to Southwest’s most recent 10-Q) of those AirTran 717s are leased aircraft, and it appears that most of these are leased from Boeing. AirTran is the biggest customer of Boeing’s leasing arm, Boeing Capital Corp., representing 29.9% of the firm’s total portfolio at the end of the first half of 2011. In addition, AirTran accounted for 21% of Boeing Capital’s total revenue during the first six months of this year, according to regulatory filings.

The way I look at things – it appears that if Southwest wanted to get out of those 717 leases early, it probably could work something out with Boeing. Something like that could happen if Southwest was interested in making some new orders anytime soon.

Of course, this all depends on how Southwest feels about the 717 overall. After doing some of my own number crunching, it appears the aircraft might not be a great fit from a cost perspective. Using total operating costs from Form 41 financial data, and ramp-to-ramp time from Form 41 traffic data,  the operating cost per block hour for the AirTran 717 in all of 2018 is around $3,211, higher than the $2,922 I calculated for the airline’s 737-700 aircraft.

Now, Form 41 data doesn’t always paint the clearest picture – and of course every airline has their own internal data that is the best source of cost information – but the public government data does suggest that that the cost performance of the 717 might leave a bit to be desired.

Either way, it will surely be interesting to see how Southwest utilizes the 717, and also how the airline considers that gauge of aircraft in the future.

As many here already know, Allegiant and Spirit have each challenged some of the new DOT consumer protection rules in court (the two cases have since been consolidated).

Interestingly, Southwest has tossed its hat in the ring, though the airline’s complaint only deals with the full fare advertising rule. Currently, only some government taxes and fees (like the 7.5% excise tax) are included in fare quotations. Once the rule becomes effective, all taxes and fees will have to be lumped in.

Here’s what Southwest had to say in a recent DOT filing requesting a stay of the effective date:

[The rule] is based on unsupported speculation and conjecture that consumers are deceived by a practice that DOT has repeatedly reaffirmed over the years as being in the public interest, and which DOT, as recently as five years ago, found there was a “compelling” reason to continue. The Rule also improperly prohibits airlines from informing consumers of applicable fees and taxes in a conspicuous way that will ensure that the consumer will easily see and understand that important information.

What’s more interesting is Southwest’s estimated costs of complying with the new rule – which total $24 to $30 million. Interestingly, only $6 million of this total relates to the IT costs of compliance. The biggest component of the estimate is “$18 million to $24 million in previously expected revenue that would be lost by delaying for at least three months the implementation of certain critical revenue generating projects.”

Naturally, one wonders exactly what these “revenue generating projects” are.

Another one of Southwest’s complaints is extra complexity. The airline argued that “for most of Southwest’s 0&D markets it will be impossible for Southwest to advertise a single accurate price to cover all possible itineraries between the origin and destination points.” (For example, a connecting itinerary could contain additional government fees, like another passenger facility charge, or PFC.)

The airline also said it would “be uniquely hurt” by the new regulation due its recently-updated Rapid Rewards program, which is based on money spent with the airline. According to Southwest, the rule “will add a level of complexity to what is currently a straight-forward , easy-to-use process by consumers.” For what it’s worth – so far we haven’t seen anything from JetBlue or Virgin America on this subject – which have the loyalty programs that are most similar to Southwest’s.

Right now, the exact fate of the rule is still up in the air. The DOT has denied Southwest’s request to stay the effective date of the rule, and has done the same for a similar request from Allegiant and Spirit. The court case is still pending. Meanwhile, the DOT extended the effective date of the rule (along with some of the other regulations) after groups like the Air Transport Association requested more time.

I’ve long pondered the future of Southwest’s fleet of 737-300s. It seems that the Texas-based carrier has planned to keep at least a significant portion of the fleet flying for the years to come, especially when one considers the installation of winglets on some -300s along with plans to upgrade some -300 cockpits to help facilitate Required Navigation Performance (RNP) operations that burn less fuel compared to traditional approaches.

Such a fleet plan makes sense. With these upgrades, the 737-300 becomes more fuel efficient. Paired with the fact that new airplanes are expensive, the -300 probably looks pretty good to Southwest from a total cost of ownership perspective.

But it would certainly appear safe to speculate that the depressurization event Southwest experienced a couple of weeks ago could certainly have some implications for its plans for the 737-300 series. “Obviously we’ll work with Boeing Co. to decide what’s the best reliability answer, what’s the best economic answer in terms of retirement versus replacement of new aircraft,” said Southwest CEO Gary Kelly at a recent conference when asked about the event’s impacts.

The current FAA Airworthiness Directive (AD) mandates inspections every 500 cycles for certain 737 Classics with a certain lap joint construction. According to DOT data, the average Southwest 737-300 had six daily departures in the third quarter of 2010. Roughly speaking, that means the aircraft affected by the AD would need to be inspected about every 83 days.

A press release from the FAA said that 80 aircraft based in the United States, mostly with Southwest, were affected by its Airworthiness Directive. The 737 Classics affected are line numbers 2553 through 3132, inclusive. These are some of the newest 737 Classics, produced from 1993 through 2000, according to Flightglobal.

Herein lies a problem for Southwest, I think. It would appear logical that the newest 737-300s would receive winglets and updated cockpits. According to Southwest’s 2010 annual report, 454 of its 548 aircraft are equipped with blended winglets. All of the 737-700s are equipped, and none of the 737-500s have winglets, so that leaves 102 of Southwest’s 171 737-300s with the modification.

It appears that the vast majority –over 75% – of Southwest’s 737-300s with winglets are affected by the FAA’s Airworthiness Directive, according to data from Ch-Aviation.ch. It seems safe to assume that at least a portion of this fleet could have been slated for cockpit upgrades as well.

So a question emerges – what will be the cost of the additional maintenance on the 737-300s affected by the AD? And how does this compare to the savings generated by winglets and cockpit upgrades later on? The answer will probably not be known until the Flight 812 (CHECK) incident is fully investigated.

If the benefits still exceed the costs, I figure Southwest’s plans will largely remain the same. But what if Southwest decides to begin accelerating the retirement of the 737-300?

Lately, Southwest has used its new 737-700 deliveries as replacements for retiring -300s, and the carrier could certainly continue doing so. According to Southwest’s annual report, Southwest has 88 737-700s on firm order in 2011 and from 2013 through 2017, and also has 37 options from 2013 through 2017. The firm orders alone outnumber the number of aircraft affected by the FAA’s AD.

But what about future capacity growth? In addition, what about Southwest’s evaluation of the 737-800? The carrier has said orders for this type would come from converting -700 orders. So far it has converted twenty 737-700 orders to -800 orders, all for delivery next year.

It’s also worth noting that future merger partner AirTran has 51 737 orders on the books for delivery from this year through 2017, according to its 2010 annual report.

Even if we completely ignore the events of the past few weeks, it is still fascinating to consider Southwest’s current thoughts on the 737-300. While the 737-700 has served as the traditional replacement for the type, is it still the best option?

Certainly an important factor in this scenario is Boeing’s plan for the narrowbody segment. Will the carrier announce a clean-sheet airliner in the near future? Or, will the manufacturer announce a re-engined 737, as predicted recently by Airbus’ John Leahy? If Boeing does indeed go with a new-build option, one also wonders if Boeing remains interested in producing aircraft near the size of the 737-600 and -700.

Airbus’ A320neo family is certainly another option that Southwest could consider.  But that option isn’t the greatest, at least if you believe Boeing’s rhetoric. Boeing Commercial Airplanes President and CEO Jim Albaugh told the Seattle PI last month that the 737 has good operating cost performance, saying that “even after the re-engine we’ll be 2 percent better [than the Airbus offering], and that’s if we do nothing on this airplane,” he continued.

Of course, every aircraft producer will spin the numbers to make their product look the best, but one wonders if the benefits of the A320neo are enough to unravel a partnership between Southwest and Boeing that has lasted for nearly 40 years.

A third option – Bombardier’s CSeries – might have a compelling case at Southwest. The CS300 would seat around the same number of passengers as a 737-300 (137) while offering operating cost advantages over both the -300 and -700. Southwest’s 737-300 fleet is large enough that a CS300 order would not make for an orphan fleet.

In addition, the CS100 could be an interesting option for Southwest to consider as a replacement for its aging 737-500s and the AirTran 717s as those aircraft come off lease. A major question here, of course, is if Southwest still desires to operate smaller aircraft.

Maybe we’ll get some interesting nuggets from Southwest when the carrier announces first quarter earnings in the next few days.