By Suspending Boeing 737-800 Order, Southwest Saves $1 Billion

| About: Southwest Airlines (LUV)

On Wednesday May 16th, Southwest Airlines (NYSE:LUV) announced that it will suspend the delivery of thirty Boeing (NYSE:BA) 737-800 jets over a period of four years. Investors should note that the move is part of Southwest's continued effort to minimize costs over the same period. The ideology behind the deferment will essentially save Southwest Airlines nearly $1 billion in capital spending. That being said, LUV needs to keep prices down in an effort to stay competitive and at the same time try and remain profitable. In terms of Boeing, the suspensions of these orders bring their current total of unfilled orders to 1,530.

Following Southwest's annual meeting of shareholders, CEO Gary Kelly noted the company's guidance and intentions behind the suspension, "Right now LUV is very focused on hitting our profit target. We'll have plenty of aircraft in the future that will allow the company to grow".

The play here for both stocks is pretty straightforward, investors should aggressively acquire a position in Southwest while being much more conservative in your position when it comes to Boeing. Not only have the last three quarters solidified Southwest's presence as a discount airline, but analysts have reacted quite nicely since the company has beaten EPS estimates by an average of 29.5%. If they can return to profitability in the next quarter and continue to be proactive in their mission to cut capital spending there's no reason why LUV can't return to the $10/share level.

Do I believe this contract deferment hurts Boeing? Yes. However, the company is much more diversified then Southwest is and therefore won't be damaged but the suspension of these orders. The stock is a great buy especially since it trades at a P/E ratio of 12.53 and yields 2.4%. Investors who are looking to acquire positions in Boeing should do so conservatively. The share price currently hovers around $72.35/share and analyst expectations for the second quarter should be easily surpassed. The street is calling for BA to earn $1.08/share on revenue of $19.47 billion dollars, however I see them earning $1.16/share on $19.88 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.