Entering 2020, Southwest Airways (NYSE: LUV) was determined to get the Boeing (NYSE: BA) 737 MAX again in its fleet as quickly as achievable. The COVID-19 pandemic modified that in a hurry. As air journey demand from customers plunged, Southwest swiftly moved to lessen its close to-expression aircraft deliveries.
On Wednesday, Southwest introduced a new settlement with Boeing that further minimizes close to-phrase 737 MAX deliveries. The reluctance of its ideal customer to take delivery of new aircraft in 2021 highlights how the recertification of the 737 MAX and rollout of COVID-19 vaccines did not resolve all of Boeing’s issues.
Aircraft requirements plunge
Southwest Airways only operates 737s, so the grounding of the 737 MAX in early 2019 upended its fleet system. Whereas it experienced intended to grow its fleet last 12 months, its lively fleet wound up shrinking virtually 5% owing to shipping and delivery delays. Prior to the pandemic, Southwest’s fleet prepare identified as for obtaining a complete of 123 new Boeing 737 MAX jets in 2020 and 2021 to capture up on aircraft replacements and fleet expansion.
Graphic resource: Southwest Airlines.
By April, Southwest experienced created dramatic cuts to its fleet prepare thanks to the pandemic. On the company’s 1st-quarter earnings get in touch with, management declared that it experienced achieved an arrangement with Boeing to acquire no a lot more than 48 plane deliveries by way of the conclude of 2021.
On Wednesday, the airline disclosed an up-to-date agreement with Boeing. Southwest Airways now expects to obtain just 35 Boeing 737 MAX 8s via the close of 2021. That will go away it with about 747 plane in its fleet at the finish of following 12 months, in line with its fleet rely a year in the past. The initially seven of people deliveries should occur this thirty day period, with the remainder arriving in 2021.
Deferring 13 737 MAX deliveries out of 2021 is a reasonably modest change. That reported, Southwest Airlines has arguably the best balance sheet in the airline market and has been aggressively introducing new towns to its route network in recent months. Also, the availability of highly productive COVID-19 vaccines should to bolster demand by the next 50 % of 2021. If Southwest Airlines is trimming its fleet plan even with these positive elements, it won’t bode properly for Boeing’s efforts to operate down its stock of about 450 saved 737 MAX jets.
Who won’t enjoy absolutely free?
Introducing insult to personal injury for Boeing, Southwest Airlines reported that it expects plane cash paying out to be “immaterial” in the fourth quarter of 2020 and 2021. In other words, the small-fare airline will fork above very little or no hard cash for the 19 aircraft it is acquiring from Boeing immediately in excess of this time period. (Southwest is leasing the other 16 737 MAX jets scheduled to get there by the stop of 2021.) Predelivery payments that the airline currently created and shipping and delivery credits compensating Southwest for the charge of the 737 MAX grounding are masking the invest in cost.
To some extent, this shouldn’t be shocking. Over the earlier two decades, Boeing has booked about $9 billion of approximated consumer concessions to deal with fees and lost profits relevant to the 737 MAX grounding. As of Sept. 30, it experienced a remaining liability of $6 billion for these shopper concessions.
That said, Boeing experienced currently designed $828 million of funds payments to Southwest Airways as portion of an first payment bundle. Seemingly, that did not occur close to enjoyable the entire legal responsibility. Additionally, Southwest’s capacity to “invest in” 19 737 MAX jets with no incremental funds outlay highlights why Boeing is on pace to continue burning hard cash in 2021, introducing to its stability sheet woes.
More discomfort forward for Boeing
Boeing inventory has rallied in modern months on developing optimism that the twin crises of the 737 MAX grounding and the pandemic are ending. Yet even though air vacation need will start off to recuperate in 2021, it will continue to be very small in contrast to the previous couple of many years, weighing closely on Boeing’s plane deliveries — and its dollars flow.
As of Sept. 30, Boeing had around $28 billion of money and investments, so it’s not in any hazard of managing out of income. (It issued a further $4.9 billion of credit card debt final month, bolstering its liquidity.) Even so, it will acquire yrs for the corporation to mend its stability sheet. In the meantime, it will incur elevated interest expense and won’t be ready to distribute a lot income to shareholders. Boeing is also diluting shareholders’ passions by contributing inventory to its retirement programs and building inventory grants to most workforce this month in lieu of raises.
Plane desire certainly won’t keep at modern negligible ranges for extremely very long. Yet, the newest update from Southwest isn’t going to inspire assurance about Boeing’s skill to make a complete recovery whenever quickly.
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