April 5, 2021, © Leeham News: Southwest Airlines didn’t ask Airbus to submit a commercial bid for the A220-300, three knowledgeable sources tell Leeham News.
Southwest conducted an internal technical analysis of the A220-300 vs. the 737-7 MAX. The A220-300 offered better economics. But this competed against the costs of retaining a common 737 fleet.
“Southwest acknowledged the merits of the A220, but there was no competition” for a commercially-based bid, LNA is told.
The airline placed an order on March 29 for 100 737-7s. Southwest said the order was an outgrowth of talks with Boeing for compensation due to the 20-month grounding of the MAX.
In its press release, Southwest announced “the completion of its previously disclosed discussions with Boeing regarding the restructuring of its delivery schedule for MAX aircraft. The Company has completed the multi-year evaluation of the successor aircraft to its Boeing 737-700 model, with the selection of the Boeing 737 MAX 7 aircraft. Southwest Airlines® and Boeing reached agreement on 100 firm orders for MAX 7 aircraft, with the first 30 scheduled to be delivered in 2022.”
Southwest also said, “We now estimate contractual aircraft capital spending for all years 2021 through 2026, which consists of 169 MAX firm orders with Boeing (135 MAX 7 and 34 MAX 8 aircraft), to be approximately $5.1bn. Our estimated contractual aircraft capital spending remains immaterial in 2021 and is expected to be approximately $700m in 20223. We continue to estimate 2021 capital expenditures to be no more than $500 million, driven primarily by technology, facilities, and operational investments.”
Southwest footnoted this statement. The capital expenditures are “Net of progress payments made on undelivered MAX aircraft and previously agreed upon delivery credits provided by Boeing to the Company due to the settlement of 2020 estimated damages relating to the Federal Aviation Administration (FAA) grounding of the 737 MAX aircraft.”
Boeing, in its press release, outlined services provided in the contract. ”
As part of the agreement, Southwest will also expand its use of Boeing’s digital solutions to support its 737 MAX fleet, including Airplane Health Management, Maintenance Performance Toolbox and digital navigation charting tools. Boeing will also provide system software upgrades and new wireless communications-enabling equipment to support Southwest’s operations.”
These services are likely either free or sharply discounted as part of the grounding compensation.
Southwest’s press release infers a $30m per-plane price for the MAX 7, excluding previously paid deposits and progress payments on the MAX 8. Seventy MAX 8 orders were swapped to the MAX 7.
However, Boeing previously paid Southwest nearly $500m in cash compensation because of the grounding. This likely offsets deposits and progress payments.
Southwest will receive 30 MAXes next year. The financial figures suggest Southwest will pay only $23m per plane upon delivery, allowing for deposits and progress payments.
Boeing’s financial terms and compensation due Southwest made it impossible for Airbus to match even if invited to bid. Furthermore, Airbus’ sales philosophy changed since the 2018 retirement of John Leahy as COO-Customers.
The aggressive Leahy was often willing to pursue creative deals to break Boeing’s incumbency. (Leahy’s willingness had limits, however. He never seriously pursued a deal with Ryanair, a rock-solid Boeing customer.)
But under his successor, Christian Scherer, Airbus is less willing to drop prices to rock-bottom levels to win a deal. Scherer is known to see the A320 and A220 families as more technologically advanced than the 737. He has noted these aircraft still have growth opportunities, while the 737 is maxed out. A stretched A220-500 and an “A322” or A321 Plus-Plus designs are on the shelf, waiting to go when the time is right. The A220-500 is a question of when, not if, a person close to the situation tells LNA.
Taking a page from decades-long messaging by Boeing, Scherer believes Airbus can command a premium over Boeing.
Scherer was unwilling to drop the price of the A321neo to levels requested by Alaska Airlines in the recent competition. Alaska, also due compensation from Boeing over the MAX grounding, placed an exclusive order with Boeing. Future 737-9s will replace the A319s/320s remaining from the 2016 Virgin America acquisition. Only A321neos stay in the fleet.
Alaska still has 30 orders from Virgin for A320neos. Alaska said it won’t take delivery of these. The order can be canceled with a loss of $15m in deposits. But it’s still possible some of these orders might be swapped into A321neos, an airplane Alaska likes.