Market Overview

Southwest Just Bought a TON of Boeing's New 737s

Share:

I guess I never really thought about how many airplanes an airline would need. Surely, they'd be a major purchase that would get bought in batches, a few a time, right?

Maybe, maybe not. But today, that's definitely wrong, as Southwest Airlines (NYSE: LUV) just bought 150! of Boeing's (NYSE: BA) new 737 MAX airplanes, with the first delivery scheduled in 2017.

Southwest also expanded its current order for 58 additional 737NG aircraft. These new orders join an existing firm order book of 142, bringing Southwest's total firm orders with the Boeing Company to 350 for 2012 through 2022, which are intended to predominately serve as replacement aircraft as the airline continues the modernization of its fleet.

I don't even want to think what it might cost to buy 350 giant airplanes. Probably about what Donald Trump spends on hair and hair gel.

"Today's environment demands that we become more fuel-efficient and environmentally friendly, and as the launch Customer of the Boeing 737 MAX, we have accomplished both," said Gary Kelly , Southwest Airlines Chairman, President, and CEO. "We are teaming up with our friends from Boeing to lead the industry in a way that makes both our Shareholders and our Customers proud to associate with Southwest Airlines. Today's announcement will allow us to maintain our position as a low-cost provider in the years ahead."

"We are enthusiastic about our fleet modernization plans, and especially about becoming the launch Customer for the Boeing 737 MAX," said Mike Van de Ven , Southwest Airlines Executive Vice President and Chief Operating Officer. "The much improved fuel efficiency of the 737 MAX will enable us to improve our fuel costs, as well as our environmental performance, with great comfort and reliability to offer to our Customers."

Van de Ven continued, "Overall, we expect the superior economics of our fleet modernization plan to meet our 15 percent pretax return requirement and provide substantial flexibility to manage our growth in a variety of economic conditions over the next decade. Additionally, these new aircraft will enhance the Customer Service offering with the new Sky Interior."

ACTION ITEMS:

Bullish:
Traders who believe that this purchase highlights continued years of success for the companies involved might want to consider the following trades:

  • Boeing (NYSE: BA) will obviously be a big beneficiary here. Their revenues could rise in the coming years, as these orders are fulfilled. If the new, larger planes are a success for Southwest, other Airlines may rush to order more planes for themselves, further boosting the bottom line.
  • Southwest (NYSE: LUV) could gain a lot of efficiencies if the new planes truly allow them to pack more people onto a plane. Their margins improve greatly if they can add a handful of customers per flight without much additional cost. This could be a big win for them.

Bearish:
Traders who believe that you'd have to be high on drugs to even THINK about buying 350 new planes in an industry where bankruptcy isn't even a bad word, may consider alternate positions in the following:

  • Any airline but Southwest. Early adopters of technology often overpay for mediocre (by later standards) gadgets. Striking first might have made sense now, but will it in 5 years when planes are cheaper and more efficient than these? Will technology shift before the contract is up in ten years? Other airlines might gain if Southwest fizzles out over this.
  • Are planes even the wave of the future? Everything else in America is going retro. Fashion looks like it's 1981, but without the benefits of punk rock. Will high fuel prices drive Americans away from planes and toward trains for mass transit? If so, what about taking the position I take when I play Monopoly, and buying up all the railroads? Burlington Northern (NYSE: BNI), Norfolk Southern (NYSE: NSC) and Union Pacific (NYSE: UNP) are a few of the better-known rail stocks.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas News Short Ideas Contracts Travel Events Trading Ideas General

 

Related Articles (BA + BNI)

View Comments and Join the Discussion!

Keefe, Bruyette & Woods Comments on Host Hotels & Resorts

BMO Capital Markets Comments on Hecla Mining