Analysis: Early Christmas

Boeing’s decision to re-engine the 737NG instead of launching an all-new aircraft program may have been revealed last July when American Airlines (AA) announced a massive narrowbody fleet modernization program that will include the new variant, but the move to upgrade the 737 with CFM International Leap-1B engines was always first and foremost about one key Boeing customer: Southwest Airlines (SWA).

Yes, completely losing AA to Airbus would have been a devastating blow. But losing SWA as its signature 737 customer represented the nightmare scenario for Boeing, one that was officially avoided last month with the announcement of the Dallas-based carrier’s firm commitment for 150 737 MAX aircraft. The aircraft were part of a total order for 208 737s (the other 58 will be 737-800s) valued at $19 billion at list prices. The manufacturer said the deal represented its largest-ever firm order (both in terms of units and value) and provided a major boost to the MAX program, for which SWA will serve as the launch customer.

“It truly is Christmas come early for Boeing,” said Jim Albaugh, Boeing Commercial Airplanes’ president and CEO, at a Dec. 13 news conference in Dallas announcing the order. He said Boeing now has 948 commitments for the MAX (the customers are largely unknown and, aside from SWA, the commitments are not yet firmed) and predicted 1,400-1,500 commitments by early 2012. The MAX’s entry into service is slated for 2017.

SWA chairman, president and CEO Gary Kelly said the re-engined 737 will be “coming at the right time” for the low-cost carrier (LCC). “One of the main challenges we face is high fuel costs,” he explained. “We are very much in need of new technology to reduce the fuel burn.”

He made no announcements about growth plans, saying the newly ordered aircraft are for now designated as replacement capacity. But Boeing provides flexibility in deliveries scheduled through 2022 and “we’re certainly positioning Southwest to grow,” he said.

SWA executive VP and COO Mike Van de Ven, who led talks with Boeing, declined to say how much the manufacturer discounted the MAX list price (ranging from $77.7 million to $101.7 million per aircraft), but did disclose that the carrier’s annual average capital expenditures on Boeing aircraft from 2012-2022 would be about $1.2 billion. “Mike negotiated long and hard and he got Southwest a very good deal,” Albaugh commented.

Van de Ven said the MAX is “tailor-made” for SWA’s network and insisted the carrier didn’t choose Boeing simply for legacy reasons. The airline is the world’s largest 737 operator with a fleet of 559 and was the launch customer for the -300, -500 and -700 versions.

“We did do comparisons between the 737 MAX and A320neo,” he said, emphasizing that the MAX came out as the clear winner for SWA’s needs. The airline said the MAX will reduce fuel burn and carbon dioxide emissions “by an additional 10%-11% over today’s most fuel-efficient single-aisle airplane.” It claimed the aircraft will have a “7% advantage over its competition.”

Boeing said the MAX’s final design configuration won’t come until mid-2013, but predicted it will have significant commonality with the 737NG, a key SWA requirement.

‘Special Customer’  The LCC’s consistently profitable business model has been based, above all else, on the efficient utilization of the 737. The airline has long been Boeing’s best advertisement for the aircraft. The manufacturer has been able to tell potential narrowbody customers around the world that the 737 underpins SWA’s success, both in terms of profitability and operational efficiency.

But the airline has been signaling for some time that the 737-700 (and even the -800 model the LCC is now incorporating into its fleet) won’t do the job much longer. At ATW’s Eco-Aviation conference in June 2010, Van de Ven warned that the 737NG was unable to deliver the “step change” in efficiency that the airline industry would need as this decade progresses.

“The time has come to develop a replacement to the workhorse narrowbodies,” he said then. He explained that today’s single-aisle aircraft only enable airlines to make “marginal improvements” in fuel burn efficiency, adding that “marginal improvements won’t allow us to meet our environmental responsibilities and economic challenges. Our industry needs better economics.”

And hanging on until 2020 while Boeing developed and produced an all-new aircraft, particularly in the aftermath of the numerous 787 program delays, was simply too long and too risky of a wait for SWA, especially with the Bombardier CSeries and Airbus A320neo aircraft set to start appearing by mid-decade on routes on which the LCC will be competing.

Albaugh said at the signing ceremony in Dallas that he had a very direct conversation with Kelly during negotiations for the MAX order: “Gary’s message to me was simple: ‘Make sure I have the most efficient aircraft in the market. I’ve had the most efficient aircraft and make sure I continue to have it.’”

For Boeing, it was critical that Kelly continued telling the world about the 737’s virtues. “Southwest truly is a special customer,” Albaugh said.