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By Judson Rollins

Introduction 

May 6, 2024, © Leeham News: Southwest Airlines, still awaiting the certification and delivery of the Boeing 737 MAX 7 as a replacement for its aging 737-700s, might have an unorthodox alternative: acquire startup Breeze Airways for its Airbus A220 fleet – and, more importantly, its order book.

Source: Orlando International Airport via Simple Flying.

Launched in 2021 by serial airline entrepreneur David Neeleman, Breeze operates 23 A220-300s, 10 Embraer E190s, and six E195s to 47 airports across the US. It focuses on connecting larger airports to smaller cities, including a handful of transcontinental routes.

Ironically, the Utah-based airline achieved its first-ever monthly operating profit in March. It recently announced plans to operate the A220 exclusively by the end of this year.

According to a January update from database provider Cirium, Breeze has between 11 and 13 A220s scheduled for delivery each year through 2028. No options are listed.

Market intelligence says Airbus Commercial Aircraft CEO Christian Scherer visited with Southwest executives in Dallas and Breeze leadership near Salt Lake City in mid-April. This was well after Breeze’s February order for 10 additional A220s.

Summary

• To deliver or not to deliver the MAX 7?
• Southwest’s aging 737-700 fleet has few replacement options
• How a Breeze acquisition might play out
• Azorra Aviation is likely a key partner in helping Southwest get A220s

To deliver or not to deliver the MAX 7?

LNA is told that Boeing is internally debating whether to pause certification and production of the MAX 7 to prioritize the MAX 10.

The MAX 10 has nearly four times as many orders as the MAX 7 (1,181 to 362, before recently announced MAX variant substitutions by Southwest and United Airlines). Also, LNA believes Boeing’s -10 unit profitability would be substantially higher than the -7. The price differential of larger derivatives typically exceeds their incremental material and labor costs, and the certification cost of a new subtype is typically a small percentage of incremental revenue.

Furthermore, Southwest was a launch customer for the MAX, which usually results in below-market pricing, and its orders comprise an overwhelming 90% of the known -7 order book.

To be sure, Boeing’s self-inflicted MAX woes will result in above-average certification costs for the uncertified MAX 7 and MAX 10. However, incremental profit from delivering the -10 will almost certainly be several multiples of the -7. Boeing undoubtedly wants to improve its margins and expedite cash flow so it can service existing debt and maintain its investment-grade credit rating.

Thirty-two MAX 7s have already been assembled, compared to just two -10s. But Southwest would be unlikely to accept such a small subfleet if -7 production is halted or deferred for years. Instead, Boeing would likely hold such “early builds” in storage until certification and then sell them as Boeing Business Jets.

Southwest’s aging 737-700 fleet has few replacement options

As of January 2024, the Dallas-based airline operated 407 737-700s, of which 176 or 43% have 20+ years in service.

Given an already long path to certification for the -7, any de-prioritization in favor of the -10 would force the Dallas-based carrier to find alternative models to replace its -700s.

Airbus has shown little interest in selling A319neos, but the A320neo is too large to be a suitable replacement. Furthermore, the A320 family is sold out into the 2030s. This leaves the MAX 7 and A220-300 as the only potential options. This line is essentially sold out through 2026. The A220-300 can seat up to 160 in a single-class configuration, making it a natural upgauge candidate from Southwest’s 143-seat 737-700s.

Breeze has the sixth-largest A220-300 fleet in service today, but its order book of 90 places it behind only Delta Air Lines and JetBlue Airways. Given the regulatory backlash against last year’s proposed merger between JetBlue and Spirit Airlines, a Delta-Southwest or Southwest-JetBlue combination would be out of the question. Breeze is also the largest startup A220 operator by a wide margin.

This means acquiring Breeze might be Southwest’s most expeditious option to replace its -700s.

How a Breeze acquisition might play out

Breeze has experienced just one profitable month in three years of operation and doesn’t bring much brand equity to a potential deal. Accordingly, its acquisition value would be mostly limited to its existing aircraft and order book, plus airport slots and gate rights in Los Angeles and San Francisco.

Market intelligence puts the price of new A220-300s at $35m-$40m. Today’s availability constraints could lead Southwest to value Breeze’s future delivery slots at up to $5m each. With some allowance for depreciation on existing aircraft, the value of Breeze’s fleet plus order book would be roughly $1.1bn.

Considering Breeze’s other assets and a likely transaction premium, a purchase price of less than $1.5bn seems entirely reasonable. As of March 31, Southwest had $10.5bn in cash and cash equivalents, so an all-cash transaction would be possible without endangering the airline’s liquidity. (Its investment-grade credit ratings would support borrowing at a reasonable interest rate.) A part- or all-stock transaction seems unlikely for a relatively small transaction, and Breeze investors may be less interested in Southwest shares than cash.

Southwest management has long been regarded as significantly more risk-averse than its peers, but its long, exclusive ties to Boeing have painted it into a strategic corner. The airline’s executives may finally be persuaded that the negotiation leverage and risk mitigation of a multi-OEM fleet strategy outweigh its complexity costs.

The Dallas-based carrier is no stranger to acquisitions, having purchased rival AirTran Airways in 2011. Southwest also made an unsuccessful bid to acquire Frontier Airlines, an A320 operator, in 2009.

A Southwest-Breeze transaction would be a historical repeat for Neeleman. In 1993, Southwest acquired Morris Air, where he was an executive and equity holder.

One possible wild card: Given the growing pilot shortage in North America, will Southwest have enough cockpit crews for its entire planned fleet? This could tip management away from adding new types, instead prioritizing the crewing of its existing 737-800s and current/future MAX 8s at the expense of the aging -700s.

Azorra Aviation could be a key partner in helping Southwest get A220s

Breeze leases its E190s and E195s from Azorra Aviation, Nordic Aviation Capital, TrueNoord, and Elevate Capital Partners, and its A220s from Azorra, AerCap, and Jackson Square Aviation.

Azorra, which also has 14 uncommitted A220-300s in its order book, is likely to be an essential partner in a Southwest-Breeze transaction. Only Air Lease Corp. and Macquarie Airfinance have more uncommitted A220s on order. Florida-based Azorra also acquired 12 low-time A220-300s from EgyptAir and was thought to be negotiating to buy 10 more from Korean Air earlier this year.

Neeleman is also a board member at Azorra.