Boeing climbs as Southwest places big order for smallest Max

Boeing Co. rose after Southwest Airlines Co. ordered 100 of the smallest version of the 737 Max at deeply discounted prices, cementing a half-century relationship and ending a public flirtation with Airbus SE.

The deal strengthens Boeing’s first-quarter sales as well as its campaign to bolster the narrow-body plane after two fatal crashes spurred the longest U.S. jetliner grounding in history.

Southwest, meanwhile, will get a bargain: The carrier plans to spend just $5.1 billion to add 169 new 737 Max 7 and 8 models over the next five years, according to a company statement Monday. That works out to $30.2 million a plane, well below the $46 million base value that appraiser Oriel estimates the Max 7 will have over the longer term, once supply and demand are aligned.

The airline chose to continue its decades-long history of flying only the 737—valuing economics and simplicity in its fleet of more than 700 aircraft—after hinting for more than a year that it might switch to the Airbus A220. The Southwest deal provides a boost to the slow-selling Max 7, which is on track to be certified this year by U.S. regulators, Boeing said.

The order is “a strong endorsement for the smaller version of the plane, with just 37 purchases” before Southwest’s order, based on data from Cirium, Bloomberg Intelligence analyst George Ferguson said in a report.

“The 737 is the largest cash generator for the company and large orders from core customers such as Ryanair and Southwest are keys to long-term success for the airplane and Boeing,” Ferguson said. Ireland-based discount carrier Ryanair Holdings Plc reached a deal for 75 Max jets in December.

Boeing advanced 2.1% to $250.05 at 1:53 p.m. in New York, the biggest gain on the Dow Jones Industrial Average. The shares had gained 14% this year through March 26. Southwest slipped less than 1% to $60.74 in Monday trading, while Airbus’s American depositary receipts posted a similar decline.

Southwest began seriously reviewing the 150-seat Airbus model in 2019 after the global grounding of the Max. A deep slump in travel demand from the Covid-19 pandemic presented an opportunity for Southwest to consider adding another aircraft type to its fleet with less disruption to its operations, Chief Executive Officer Gary Kelly had said. But the order was considered Boeing’s to lose and in the end the long-time trade relationship remained intact.

“Today’s commitment to the 737 Max solidifies our continued appreciation for the aircraft,” Kelly said in Monday’s statement.

“We reinforce our commitment to the Max and our all-Boeing fleet, and this was our preference all along,” he said in a message to employees. “But as the Max 8 is the best aircraft in the 175-seat class, we needed to make sure the Max 7 is the best aircraft in its 150-seat class.”

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The deal will establish the Max 7 as a mainstay of Southwest’s fleet and help resolve concerns that Boeing’s sales revolved around one model: the best-selling Max 8. Southwest plans to take delivery of 200 of the smaller jet over the next decade—with the first 30 handovers scheduled for next year—along with 149 of the midsize model.

The airline’s 349 firm orders for the Max 7 and 8 amount to 11% of Boeing’s total narrow-body order backlog, and Southwest has options for 270 more planes through 2031. The carrier is slated to receive 28 of the midsize Max 8 jets this year, including nine from lessors. Southwest will end the year with 729 aircraft.

Discount Hint

Southwest’s planned capital expenditures hint at the heavy discounts that Boeing offered to seal the deal. The airline had an undisclosed amount of delivery credits and an $828 million cash settlement with Boeing over the Max grounding, plus delivery delays it could have used to reduce the purchase price. In addition, Southwest had made payments to Boeing earlier when it wasn’t getting planes.

The carrier’s estimated contractual aircraft spending is “immaterial” for this year, despite the delivery of the Max 8 planes, and should total about $700 million for the 30 jets due to arrive in 2022, Southwest Chief Financial Officer Tammy Romo said in the statement. She didn’t disclose how much money has already gone into down payments on the new jetliners the airline is adding.

The Dallas-based company wants to retire the 462 Boeing 737-700 planes in its fleet over the next 10 to 15 years, and needs a smaller jet on some routes than its current 175-seat 737-800 and Max 8 models. One of the chief advantages of the newer Max line is the fuel efficiency of its engines.