Southwest Airlines Faces Major Changes With MAX Return

Dec. 10, 2019 5:08 PM ETThe Boeing Company (BA), LUVDAL, EADSY102 Comments36 Likes
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Tim Dunn
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Summary

  • Southwest Airlines has been the most impacted U.S. airline because of the Boeing 737 MAX grounding.
  • Southwest is re-evaluating its network, product and fleet strategies due to the MAX grounding with significant changes to occur.
  • Southwest's single supplier relationship with Boeing is being tested even as mounting evidence shows that the 737 might be the best single aircraft for Southwest.
  • While focused on returning the MAX to service, Boeing is increasingly being forced to evaluate its product lineup.

Southwest (NYSE:LUV) is the most consistently profitable airline in the history of commercial aviation. For nearly five decades, it has carved out a niche for itself in the airline industry by offering a simple but efficiently delivered service that made air travel affordable for more people than ever - and its model has been copied by low cost airlines around the world.

But the Boeing (NYSE:NYSE:BA) 737 MAX grounding has presented Southwest with one of the greatest challenges it has ever faced. After years of growth, sometimes rapid and sometimes more measured, Southwest has spent much of 2019 in a no-growth mode, an unthinkable position for a low cost airline and one that has resulted in a top to bottom re-evaluation of what has worked and what has not at Southwest. With an exclusively 737 fleet and with the MAX as their only means to grow, Southwest has had to scale back its growth and its network and redouble its efforts to remain profitable even though a number of costs have continued to increase. Thankfully, fuel costs for 2019 have been below levels of 2018 and the entire U.S. airline industry has benefited. From a financial standpoint, Southwest has done an absolutely outstanding job of navigating the MAX grounding.

Grounded Southwest 737 MAX aircraftsource: CNBC

The return of the MAX might be just a few more months away or it might be longer - but it is certain that Southwest will not be the same airline after the MAX returns to service as it was before. And it shouldn't be because the MAX grounding forced Southwest to face some realities that it might otherwise not have been forced to face, not unlike what the legacy airlines faced in the post 9/11 world and the subsequent restructuring that they engaged in to survive. From a strategic and competitive standpoint, the MAX grounding has dealt Southwest a number of challenges which it can overcome but which will require significant changes to the way Southwest has operated. Some of the challenges LUV must overcome are results of strategies it has implemented over the past five to eight years and some are a result of strategies that are part of Southwest's DNA.

Southwest Flight Attendantsource: USA Today

Southwest's Business Model Works

Many industry analysts have repeatedly challenged the company to reconsider various aspects to its business model, often with a polite but firm "thanks but no thanks" from the company as it states that it has attempted to measure to the greatest extent possible the success or not of its decisions. To be fair, it is hard to believe that elements that are unique to Southwest's business model could be measured by anyone except Southwest with any degree of accuracy.

Southwest built its business model around high frequency, low cost, simple, egalitarian transportation and those key characteristics of its model have not changed. In an industry that has increasingly unbundled components of air travel, Southwest continues to offer the most "complete" transportation package with two checked bags and itinerary changes included in every fare. Southwest doesn't assign seats - a unique feature among its U.S. competitors - and continues to believe that the willingness to stand in assigned portions of the boarding lines at its airport gates facilitates the boarding process and helps cut valuable ground time from its flights. However, even its egalitarian first-come seating policy has fallen partially victim to LUV's own elite priority status as well as the opportunity to pay for an upgraded boarding position at various places in the check-in and boarding process, creating revenue worth nearly $500 million annually. Its flight attendants still take drink orders on paper and then return with a tray of prepared beverages as fast if not faster than the time it can take other airlines to serve passengers from a beverage cart. Southwest's business model is as quirky as it is carefully orchestrated to maximize profits and customer satisfaction; the U.S. DOT says that Southwest consistently is in the very top tier of U.S. airlines in terms of fewest customer complaints. But there are other elements of Southwest's business model that are much less visible or apparent to Southwest customers but which are at the heart of the questions that Southwest is having to address in the midst of its unplanned re-evaluation of its operation.

Southwest Boarding Processsource: One Mile at a Time

The LUV vs. Legacy Airline Business Model Challenge

In the early years after deregulation of the domestic U.S. airline industry in 1978, Southwest's model seemed to be the only one that consistently produced profits. A string of external shocks including the PATCO strike, the Gulf Wars, and then 9/11 resulted in enormous challenges to the legacy airline (those that operated as interstate airlines before 1978) business model. While there were airline bankruptcies before 9/11, the attacks brought the entire legacy carrier segment to its knees and all of the then-nationwide carriers filed for chapter 11 bankruptcy within 10 years - but they also emerged from chapter 11 and their individual restructurings far stronger than the legacy airline sector had ever been.

By the mid-2000s and leading into the Great Recession of 2008, Southwest saw the opportunity to grow its presence in legacy carrier hubs, many of which were in some of the top travel markets in the U.S. One of Southwest's first legacy carrier hubs to target for growth was Denver, a hub for United (NASDAQ:UAL) and a market that had also long had a low cost carrier competing with United. Within just a few years after its entrance into the market in 2006, Southwest grew its Denver operation to more than 100 flights/day, a critical threshold in providing enough size to compete with a legacy carrier in many of their top markets. Southwest hasn't stopped growing in Denver and now carries more domestic local passengers than United and their Denver schedule exceeded 200 flights/day this summer. Fresh from their early success in Denver, Southwest targeted other large legacy carrier hubs including Philadelphia, a major hub for then-US Airways. Southwest aggressively grew its schedule but then backed down and now is the third largest airline at Philadelphia behind American (NASDAQ:AAL) and Delta.

The largest market that Southwest did not serve in the U.S. was Atlanta, where Delta (NYSE:DAL) operates the world's largest hub with more than 1000 flights/day. In 2011, Southwest acquired Orlando-based AirTran which had its largest hub in Atlanta with more than 200 flights/day, which it had rapidly grown after the demise of Eastern Airlines. Southwest immediately gained a presence in one of the largest markets in the U.S. and Atlanta became one of its largest stations by the time AirTran's operations were completely taken over by Southwest. According to DOT data, Southwest had a 19% share of passengers and a 12% revenue share in the local Atlanta market (excluding connecting passengers) in 2014 but its share has fallen to 15% of the local market and 9% of the local revenue earlier this year. Delta's share of local market revenue in Atlanta has grown to 69%, making Delta's Atlanta hub the 2nd largest hub by local market revenue behind United's hub at Newark. Southwest now offers just over 100 flights/day from Atlanta.

As part of the legacy carrier mergers and slot swaps that took place over the past decade, Southwest aggressively pushed to gain and increase its access at three of the four slot-controlled airports in the U.S. earlier this decade. Southwest gained slots at Washington National and has now grown to become the second largest airline based on passengers carried, operating nearly four dozen flights/day. At New York LaGuardia, Southwest has grown to nearly three dozen flights/day, good for a third place ranking in local passengers. Southwest gained enough slots to operate 18 flights/day at Newark (the FAA later removed full slot controls at the airport) but has since ended service at Newark and its fifth place position and is consolidating its NYC operations at LaGuardia.

There seem to be pretty clear conclusions that can be drawn from Southwest's attempts to grow into some of the largest markets which are also large legacy carrier hubs. First, Denver, like Atlanta, Charlotte, Detroit, Minneapolis/St. Paul, Philadelphia and Salt Lake City are all cities/regions with only one commercial airport. In other cities such as Chicago, Dallas, Houston, and Washington DC, Southwest was able to grow its presence at one of the secondary airports while the legacy carrier's hub is at the primary airport. Southwest has large operations (more than 150 flights/day) at the secondary airports in each of those four multi-airport cities/regions. With the exception of Denver, Southwest has been unable to maintain a large operation in any of the single airport cities which are also legacy carrier hubs.

It is also noteworthy that the largest number of single airport hub cities are Delta hub cities; Delta has a higher share of the market in its hub cities than either American or United. Southwest has also cut more capacity in Delta hub cities during the MAX grounding than in the hubs for any other airline. Southwest's largest cuts by total seats or percentage of pre-MAX capacity have been in Las Vegas, Chicago Midway, and Baltimore (all of which are large Southwest hubs/focus cities and where it is the largest carrier), Orlando (where Southwest is the largest but where there is no dominant carrier), Newark (United hub, Southwest service terminated), Boston (a fast-growing DAL and JetBlue (NASDAQ:JBLU) hub), Atlanta, San Francisco (United hub), Cincinnati (former Delta hub and current focus city but where it remains the largest carrier) and Detroit (a Delta hub).

While it is not known where Southwest will deploy capacity when the MAX is returned to service, it is unlikely that they will return to the positions they once had in the legacy carrier hubs where they reduced service, with the greatest reductions in Delta hub airports followed by United's hubs.

Ultra-Low Cost Carrier Challenges

It is also noteworthy that in Las Vegas and Orlando, which are not legacy carrier hubs, Spirit (NYSE:SAVE) has been the fastest growing airline, more than replacing the capacity that Southwest has cut. SAVE has also aggressively grown in Ft. Lauderdale, where it, Southwest and JetBlue are all vying for the top spot at an airport that has become the low cost carrier airport in S. Florida and as an alternative to Miami, where American operates a hub. The MAX and A320neo family (which JBLU and SAVE operate) offers the potential to fly deep into S. America from S. Florida.

Network Changes Coming

Southwest's largest cuts and other airline capacity replacement have been in markets where legacy or ultra-low cost carriers have a large presence or can support those types of markets; in these markets, Southwest is sandwiched between legacy and ultra low cost carriers.

Southwest's business model works best in markets where it is the dominant carrier, or if it has to compete with other carriers, can grow to close to the size of other airlines. At any of New York City's airports, in Atlanta or any of the single airport hub cities, Southwest could never grow to a size large enough to compete with the legacy hub airlines. Southwest has stated that its goal in New York City is largely to be able to offer NYC as a destination for passengers from its strength markets in other parts of the country with little expectation of competing successfully for a large base of local passengers. Legacy carriers not only offer more extensive schedules in their hubs but also have strong customer bases through their loyalty programs.

We will not restore every flight that we've removed due to the MAX grounding, but will certainly want to restore the vast majority of our network, which we'd expect to produce favorable results almost immediately. You can see from our flight schedules published through mid-April that we are very focused on continued investment in Baltimore, Denver, Houston, California and Hawaii.

Tom Nealon, President

source: LUV earnings call transcript, 3Q2019 results

In markets like Las Vegas and Orlando, Southwest's model of positioning itself as a low fare leader is challenged by carriers like SAVE. Southwest's egalitarian one-size-fits-all service costs more than what SAVE can offer because it unbundles services like seat assignments and baggage and has grown much faster, resulting in unit costs that are two-thirds of LUV's. In heavily leisure markets such as the Florida and Las Vegas, many customers are willing to accept lower levels of service for lower prices; leisure markets are precisely the types of markets that can be stimulated by low fares.

In addition to legacy carrier hubs and very high volume leisure destinations, DOT data shows that Southwest has not performed as well in mid-continental markets that compete with a legacy carrier as they do in shorter haul markets. Because many of the largest coastal airports are legacy carrier hubs or where they have large operations, LUV does not have the market strength that it does in many non-coastal markets. In addition, LUV has to compete with legacy carriers that offer a domestic first class product which is much more valuable to travelers on mid-continent flights that are typically four plus hours in length. Further, legacy carriers use large domestic aircraft, in some cases with the same or more seats as LUV offers on its mid-continent flights. In addition, seat assignments are much more significant on longer flights and legacy carrier policies reward higher paying and higher status passengers with a more visible and earlier choice of the most desirable seats. As an example, Southwest, American and Delta all serve the Nashville to Los Angeles market; Southwest is the largest carrier at Nashville. In markets with competitive dynamics like Nashville to Los Angeles, it is not unusual for LUV to get just two-thirds to three-quarters of the revenue per passenger that the legacy carriers obtain. Because of similarly sized aircraft and because of the relatively low cost difference on longer domestic flights, it is very likely that LUV does not make profits as high as legacy carriers in legacy carrier competitive mid-continent markets. Southwest's unit costs are less than 15% lower than legacy carriers - and higher than Alaska and JetBlue.

As part of its attempts to maximize its profitability as part of the MAX grounding, Southwest has reduced longer haul flights and those out of legacy carrier hubs in order to be able to serve as many flight segments as possible. There is a high likelihood that those trends will continue even when the MAX returns to service because LUV gets its highest average fares relative to other competitors in markets that are 2-3 hours long and where it is either the largest from one or both cities on either end of a route. The implications of LUV's shift to shorter flights and away from routes where it has to compete as much with legacy carriers are significant both for Southwest and for its legacy carrier competitors.

And I do think that there is value to us in adding in more medium and short-haul flying… We're not moving away from long haul at all… But with more medium flying in and out of Denver, Houston, Baltimore it really does give you much greater number of itineraries, it gives you greater operational reliability and recovery. And just a really efficient network structure for us. So I think we're just building on our core point to point network is what you're seeing. Nashville is another one that you see us growing in quite a bit. So that's kind of I'm thinking about it.

Tom Nealon, President, Southwest Airlines

source: LUV earnings call transcript, 3Q2019 results

Southwest Airlines Tennessee OneSouthwest Airlines Tennessee One aircraft, source: SWA Media

It is harder to draw long-term conclusions regarding LUV's likelihood to regain the seat share it has given up in markets like Orlando and Las Vegas. These types of markets are very large so that Southwest as well as legacy carriers can serve the segment of passengers that is willing to pay fares high enough for each airline's costs in those markets.

It is equally significant where Southwest has grown capacity during the MAX grounding; they have not cut capacity proportionately from all cities and they also have not added capacity proportionately. Southwest has grown its presence in a number of markets even as their system capacity has been cut, indicating that LUV is positioning itself for the future even with the MAX grounding. Since the MAX grounding, LUV has added the most capacity in Dallas, Honolulu (launched within days of the MAX grounding), Nashville, Denver, and the California cities of San Jose, Burbank and Long Beach. Notably, all of those cities except for Denver are markets where Southwest is the largest carrier; instead of playing second fiddle to a global/legacy carrier, it can grow to a significant if not dominant position in the near future. All of the cities are also in high growth areas and, except for Nashville, are in the southern or western U.S. where LUV has long had historical strength. Nashville is one of two former American Airlines hubs at which Southwest rapidly grew after American's hub closures more than 20 years ago; as Southwest has reduced its schedule in nearby Atlanta, also with a fast growing economy, it has grown its presence in Nashville. Aside from specific mainland cities, Southwest talked about beginning service to Hawaii years ago and aggressively entered both the mainland to Hawaii and the inter-island market just nine months ago; the company states that its operations to and within Hawaii are exceeding targets - and its two most direct competitors are Hawaiian and Alaska - considerably less formidable than the legacy carriers. Southwest's growth will likely continue in fast-growing markets where it is the largest carrier, particularly in the southern and western parts of the U.S. and also in large leisure markets like Hawaii where Southwest's most directed competitors are smaller airlines and where Southwest's presence fulfills significant strategic purposes on their network.

LUV's decision to reduce long-haul domestic flights also reduces LUV's potential benefit from extending its operation to around the clock as most airlines do. LUV is one of the few U.S. airlines that does not operate redeye flights, or those that operate overnight with an early morning arrival; those types of flights are typically from the western to the eastern U.S. and take advantage of the U.S. multiple time zones.

While most of the changes regarding where Southwest flies its planes include shifts related to where it can make the most money but within its current business model, Southwest's results in one city were part of a larger shift in Southwest's business model. Southwest, along with Alaska and JetBlue, began service to Mexico City as part of a divestiture of slots that was required as part of government approval of the Aeromexico/Delta joint venture. Just a few years later, all three low cost carriers ended service to Mexico City. Southwest's inability to make Mexico City work was significant because LUV's strong presence in the southern United States should have facilitated its entry into Mexico City. The MAX provides the potential for Southwest to expand its network into Latin America, potentially opening up dozens of new foreign markets. While Southwest has been successful in adding service to Caribbean leisure destinations where most of the tickets are sold in the United States, Mexico City is a business market, the largest business destination for U.S. airlines in Latin America, and a market where there is strong demand from both the U.S. and Mexico. There are dozens more business and ethnic markets in Latin America that LUV could serve if it can succeed in serving non-leisure foreign markets.

One of the clear reasons for Southwest's inability to succeed in Mexico City was that it lacked the presence in Mexico necessary to win customers who originate their travel there; Southwest does not participate in travel industry computer reservation systems which are also used by corporate travel planners and allow sales of airline tickets in markets around the world and outside of an airline's own distribution systems. Southwest has long sold its tickets only on its own website but has increasingly realized that it loses certain U.S. corporate clients which need to be able to see Southwest's fares alongside other airlines in order to determine which is the best financial choice. Southwest will begin participation in two of the industry's reservation systems in 2020 and expects a very modest benefit of just tens of millions of dollars in extra revenue in the first half year. The far larger result is that Southwest might gain more high value customers on its current domestic routes but might also be able to expand into more cities in Latin America in the years after the MAX returns to service.

The Boeing 737 MAX

Perhaps one of Southwest's policies that has drawn the most attention since the grounding of the MAX has been LUV's long-time policy of flying only 737 family aircraft. Southwest has said it has evaluated other models but has consistently maintained the 737 family as its choice. When Boeing offered the 737 MAX to airlines, Southwest became one of the earliest to order large numbers of the airframe. The commonality within the 737 family has allowed Southwest the ability to use its pilots on any aircraft in its fleet, minimizing crew changes between flights to maximize aircraft utilization.

In reality, the single supplier, single model issue is far less significant on a long-term basis since the grounding of the MAX is very likely a once-in-a-lifetime event and also one which will be at least partially compensated for by Boeing. Southwest was never likely to have diversified its fleet solely for the sake of having two aircraft models of similar capabilities. Even legacy airlines that have many aircraft types gained similarly capable models from different manufacturers at different times, or through mergers.

Southwest's real need for consideration of a second aircraft type is because the 737 has grown from its original seating capacity of approximately 100 passengers to 143 seats on LUV's current 737-700s. Southwest has ordered dozens of MAX 7s, the smallest version of the MAX family that will push the seating capacity to near 150 seats while its 737-800s and MAX 8 aircraft seat 175 passengers. Southwest will receive only a handful of 737 MAX 7s in the near term, likely to assist Boeing in placing the MAX 7 in commercial service now even though most of LUV's MAX 7s will be delivered several years down the road. The 737-MAX 7's seat costs are not only less favorable than its larger siblings but also will likely be higher than new generation small narrowbody aircraft.

While legacy carriers have a great deal of fleet complexity, they have aircraft, including in their regional carrier fleet, that can seat half the number of seats as LUV's smallest aircraft and carry those passengers on a similar per-seat cost as larger aircraft. Having a large aircraft size limits LUV's ability to serve many small markets as well to increase frequency in markets where the number of flights offered is a factor in helping to win business passengers. Southwest serves approximately 20 fewer cities in the U.S. compared to American and United on mainline aircraft and more than 50 fewer cities than Delta with mainline aircraft. American, Delta, and United serve more than 100 additional domestic cities using their regional carrier partners which fly aircraft smaller than 76 seats, allowing those airlines to connect passengers in many small and medium-sized cities to their domestic and global networks using smaller aircraft as well as offer more frequency in key business markets. Southwest does not have that ability. Since having an aircraft which is too large can suppress fares in a market, LUV can't simply use a larger aircraft and be able to obtain fares at profitable levels.

The new generation of small narrowbody aircraft provides the potential to help LUV narrow the size gap between its current fleet and the aircraft size in legacy carrier fleets. The Airbus (OTCPK:EADSY) A220, formerly the Bombardier C Series, is the first all-new mainline aircraft since the Airbus A320, is equipped with new generation engines, and has been chosen by Delta and JetBlue in N. America. Delta currently flies more than two dozen of the 109 seat version of the A220, similarly sized to the Boeing 717s it acquired from LUV as part of LUV's AirTran acquisition. Delta and JBLU will receive their first of the 130 plus seat version of the A220 in 2020 and that version promises to offer seat costs as low as or lower than any other commercial aircraft, a major feat for a small mainline aircraft. Several airlines have voiced interest in a further stretch of the A220 that could seat 160 passengers which could be sized directly in the heart of the current 737-800/MAX8 as well as the A320. Airbus is currently focused on building production of smaller versions of the A220 and winning new customers but a family of A220 aircraft could be a compelling range of operationally cost-efficient products for Southwest.

Delta A220 cabinDelta A220 cabin, source: Delta News Hub

The Embraer (NYSE:ERJ) E2 jet family is the other potential small narrowbody aircraft that LUV could consider. Unlike the A220, the E2 family of jets is an enhanced version of the Embraer large regional jet family with new generation engines. Even though Boeing is investing billions of dollars in Embraer, the A220 has won the lion's share of new orders in the category. Boeing's investment in Embraer's commercial aircraft division is intended to give Boeing a small narrowbody aircraft smaller than the 737 family. Southwest would seem to be a good candidate for the E2 jets if it were to consider a smaller aircraft than the MAX - but LUV has said it is not currently considering the E2 jets.

As Boeing works to get the MAX back in service, there is an increasing recognition that Boeing needs to rework their narrowbody portfolio with an all-new family of aircraft that could include a small narrowbody aircraft perhaps comparable to the A220 on the low end all the way up to a transatlantic capable large narrowbody. The Airbus A321 has won nearly 80% share of the large narrowbody market via its A321, which is now being offered with versions that can operate 10 hour plus flights in a segment in which Boeing does not offer a product. Southwest is supportive of an all-new narrowbody aircraft from either Airbus or Boeing and it is certain that Boeing will pay close attention to the needs of its largest 737 customer.

Southwest's choice of any new aircraft from any manufacturer would end the single aircraft type that Southwest has benefited from with the 737 family of aircraft. With a transition likely, Southwest might be inclined to address its longer-term need for a smaller aircraft and also consider the potential for a new mid-size narrowbody aircraft at the same time. Boeing might come up with a new aircraft family that could include a full range of aircraft sizes that could allow Southwest to make just one transition from the 737 to a new generation aircraft.

A new narrowbody aircraft has longer-term importance for Southwest for many reasons but adding a new small aircraft to its fleet now might help improve Southwest's ability to compete in some of the legacy carrier markets where it is currently limited in gaining premium revenue. Southwest management will need to decide if it can risk waiting for years to address its ability to compete in small and medium sized markets while waiting for Boeing to bring an all new family of jets to market that will address both the need for a greater diversity of size in Southwest's fleet, esp. at the lower end. Even if it does not wait for Boeing, Southwest will also be able to benefit from new technology and wider cabins which many newer aircraft offer.

Investor implications

Southwest's profitability has been driven in part because of its ability to adapt to and capitalize on industry changes that have impacted other airlines negatively. A restructuring of LUV's network has been underway for months and likely will continue. While significant for LUV's presence in some of the most competitive markets in the U.S., the greater risk to LUV is Delta's continued growth in some of Southwest's top markets including Nashville, Austin, and San Jose, CA; Delta clearly understands the market dynamics between itself and Southwest and is willing to push for its own growth in some of the U.S. fastest growing cities.

The longer-term issue which will continually impact LUV is its disadvantage in serving legacy carrier hub markets, in part due to aircraft size. LUV will be forced to address the issue, part of which is fleet related and part of which is product related.

Southwest Airlines remains financially strong and the return of the MAX to service, although that might not be until well into the 2nd quarter of 2020, will allow Southwest to start growing again and will allow its unit cost growth to slow.

LUV remains in a very strong position compared to the majority of the rest of the industry. DAL remains LUV's closest competitor in many of the financial metrics.

Airline Industry Valuation Metrics

Airline Industry Valuation Metrics, source: Seeking Alpha

Airline Industry Profitability MetricsAirline Industry Profitability Metrics, source: Seeking Alpha

Although there continues to be an abundance of Seeking Alpha articles noting that nearly every airline is undervalued, Southwest might have an above average likelihood of improving its financial metrics as the MAX is returned to service. Changes to its distribution policies will likely generate more revenue upside than the company is presently estimating.

Southwest has a good chance of having a 5% premium over the industry in stock growth within the first 12 months of the MAX's return to service. Analyst price targets indicate a modest 8% upside.

LUV sellside PT analytics

LUV sellside and Price Target Analytics, source - Seeking Alpha

There has also been an abundance of Seeking Alpha articles on the Boeing Company and the impact of the MAX grounding and eventual return to service on its earnings. My primary focus is Boeing's necessity to address its lack of competitiveness in the large and small narrowbody segments of the market, the latter of which is probably most significant to Boeing.

Southwest has been Boeing's most loyal customer but Southwest execs have voiced disappointment and displeasure with Boeing as a result of the MAX grounding. As Southwest considers its future fleet needs and Boeing wrestles to rework its product lineup, Southwest will likely give greater consideration to alternatives than it ever has. Southwest's loyalty to the 737 because of operational consistency across Southwest will come to an end and they will be less and less inclined to continue to sacrifice revenue that could be obtained with other aircraft. Even if only for Southwest, Boeing needs to come up with a clear definition of its new narrowbody strategy as well as address its product line for other customers that are looking for new products from Boeing even as Airbus makes increasingly large gains from traditional Boeing customers.

Boeing Comparables ComparisonBoeing Industry Comparables Comparison, source: Seeking Alpha

BA Quant Rating

Boeing Quant Rating, source: Seeking Alpha

BA sellside and price target analyticsBA sellside and price target analytics, source: Seeking Alpha

Boeing faces much greater strategic challenges than Southwest. Return of the MAX to service will set off scores of compensation negotiations with MAX airlines even as the company will have to spend money on product development. Boeing stock might see little appreciation until the company is able to demonstrate that it has once again found the right balance between spending the right amount of money on product development and supporting its earnings. Current analyst price targets indicate a 10% upside.

Summary

Southwest Airlines is certain to emerge from the Boeing 737 MAX airline with a number of network and product differences. Its network will increasingly shift away from legacy carrier hubs and to short and medium-haul routes where LUV has a greater command of the market.

Southwest's reliance on the 737 as its sole aircraft will be tested less by the grounding but more importantly because the 737 MAX 7 and 8 are considerably larger than the 737 used to be and because other airlines operate smaller aircraft, allowing enhanced ability to generate higher profits.

As soon as the MAX is returned to service, Boeing will have to focus significant energy on redefining its product line, including addressing its lack of competitive small and large narrowbody aircraft models.

This article was written by

Tim Dunn profile picture
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Disclosure: I am/we are long LUV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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