Southwest Will Look at Buying Jets Other Than Boeing 737s After 48-Year Run

Conventional wisdom suggests that the late Southwest Airlines founder Herb Kelleher, who conceived the carrier’s all-Boeing 737 strategy, would have never considered adding another aircraft type. But Kelleher, one of America’s most shrewd airline executives, never issued such an edict.

“[People] ask, ‘What would Herb do?'” current CEO Gary Kelly said Thursday on the airline’s third-quarter earnings call. “I know what Herb did do, because we did this. We looked at it very carefully.”

Southwest has flown the Boeing 737 for its entire 48-year-history, save for a brief experiment with Boeing 727s, allowing it to save costs on pilot training and maintenance. But the airline has never pledged it would only fly the 737 in perpetuity, and it’s not doing so now, Kelly told analysts.

“As late as 2011, when we agreed to launch the Max, we gave a very serious look to an alternative,” Kelly said. “There are people who do have this question, ‘Is it time for us to look at the question? Yes. Not now. But next year. Maybe the following year. It is time to look at that question yet again. I wouldn’t prejudge the answer at all.”

The Max is a hot topic now. Southwest has been unable to fly its 34 newest-technology jets since March, when the Federal Aviation Administration grounded all Max jets due to safety concerns. In the first nine months of this year, Southwest said it lose $435 million in operating income because of the grounding.

But this is probably not all-Max related. In recent years, many airlines as large as Southwest, which has 752 airplanes, have decided they can better maximize profits by flying multiple aircraft types. They may spend more to operate several plane models, but they can also increase revenues. And if there’s a problem with one aircraft type, they still still can operate a mostly normal schedule.

Some of the world’s most profitable carriers, including Delta Air Lines, British Airways and United Airlines, fly nearly every airplane manufactured by Airbus and Boeing, allowing them to match capacity with demand.

Even Ryanair, which copied Southwest’s model for decades, is branching out. It now owns all of Laudamotion, an Austrian low-cost-carrier that flies only Airbus jets.

Southwest may or may not add a new aircraft type. But it’s serious about the process, Kelly said.

“What I feel like we are obligated to do is just debate the wisdom, strategically, of having a sole source vendor and one fleet type,” he said. “I don’t know that we have ever focused on it with that type of intensity.”

Better Deals?

Airlines that fly Boeing and Airbus planes may also get a better deal on aircraft. Many airlines like to pit the two manufacturers against each other, allowing them to pay cheaper prices.

International Airlines Group, parent of British Airways, Iberia and several other airlines, recently said it may take as many as 200 Max jets, partly because the company’s CEO wanted to reduce its reliability on Airbus jets and promote competition among Airbus and Boeing.

Southwest knows the economics of airplane purchases, and Kelly admitted the airline has been sending teams to manufacturers and other airlines to scope out the competition. That could be just a negotiating ploy – Boeing could give Southwest a better deal on future aircraft it suspects the airline might buy Airbus — or it could be real interest.

Consolidation?

Jamie Baker, an analyst at JP Morgan, pointed out Southwest can acquire Airbus aircraft without placing an order for jets. It could move decisively, Baker said, by acquiring another U.S. airline.

Earlier this week, Joseph DeNardi, an analyst with Stifel, asked whether Southwest could target Alaska Airlines, or JetBlue Airways, which does not have any 737s.

“We believe Southwest may be nearing a tipping point where the duration of the MAX grounding pushes it to consider more significant and strategic solutions, including M&A,” he wrote, adding he had no indication Southwest sought to pursue a deal.

While Kelly didn’t rule out an acquisition, he said it’s unlikely Southwest would acquire another airline for its airplanes. He reminded analysts Southwest bought Air Tran in 2011 and then leased out the airline’s Boeing 717s because they didn’t fit Southwest’s model.

“To say today, does that make us enthused about consolidation for that reason?” Kelly said. “Absolutely not. It’s irrelevant. In that sense, they are two different questions.”

Big Profits

Southwest is humming along financially despite the Max groundings, reporting net income of $659 million, with a net margin of 11.7 percent.

The airline is optimistic it can resume Max flying by February, though it made no assurances. The Federal Aviation Administration must clear the aircraft first.

Like American Airlines, Southwest said it expects to receive compensation from Boeing. But executives said they does not know how much money the airline will receive or when it will come.

This story was updated to add reference to Southwest’s brief experiment with Boeing 727s.