The Boeing Company (BA) marked down the first major buyer for its new 737 MAX model when Southwest Airlines (LUV) put in a big order. The $19 billion deal is for 208 total narrow body planes, including 150 of the new 737 MAX.
New Jet is Fuel Efficient
The primary change for the 737 is the introduction of new CFM International Leap-1B engine. The engine is expected to be much more fuel efficient due to an array of new technologies including a bigger fan diameter to decrease fuel burn and reduced weight and drag. The plane has also been touted as being more ecologically friendly due to a lower carbon footprint. The 737 MAX is supposed to reduce fuel burn and carbon emissions by 10 to 12 percent for an overall operating cost reduction of 7 percent. This should come as welcome news to the airline industry that has been battered by rising fuel costs and reduced profit margins.
AMR Corporation (AMR), the holding company that owns American Airlines, filed for bankruptcy late last month and cited rising fuel costs as one of the major drivers. The price of jet fuel has gone up 60 percent over the last five years. Now, Southwest will look to upgrade their fleet with the new jet. “Southwest is a key customer for Boeing, having only flown the 737 for 40 years, so it’s not a surprise to us that the airline has stepped up to be a launch customer for the MAX, with some pretty attractive pricing no doubt,” said RBC Capital Markets equity analyst Robert Stallard in a note to clients.
Southwest Looks to Reduce Costs
Southwest's massive order comes amid serious questions about the long-term health of the airline industry. Earlier this month, the International Air Transport Association released projections that economic troubles in Europe could seriously dampen profits for the airline industry as a whole. While North American carriers emerged largely unscathed from the reduced estimates for 2011 profits, 2012 looks to be a rough year around the industry with profit margins falling to 0.6 percent. Southwest, meanwhile, is struggling to keep costs low as it sees its cost advantage over "legacy" carriers continue to fall. Southwest is a discount carrier that relies on offering lower rates, but the Dallas-based airline has seen its cost advantage over major airlines fall by as much as 50 percent.
The move to purchase a new fleet of 737 MAX jets is a step towards reducing those costs in the long run for Southwest. “Today’s environment demands that we become more fuel efficient and environmentally friendly, and as the launch customer of the Boeing 737 MAX, we have accomplished both,” said Gary Kelly, chairman and chief executive of Southwest, in a statement. The move also helps cap what has been an especially strong year for Boeing, prompting Citigroup (C) analyst Jason Gursky to say that 2012 will be the "Year of Boeing."
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