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Friday, January 22, 2016

Southwest Airlines Lays Out Plans for Accelerated Fleet Renewal

Juliet Van Wagenen

[Avionics Today 01-22-2016] Southwest Airlines is planning to use the extra revenue generated in 2015, buoyed by previous fleet modernization initiatives and lower fuel prices, to accelerate its plans for fleet renewal. While the company plans for year-over-year fleet growth through 2018 of no more than 2 percent on average, it has revised plans to further accelerate the retirement of its classic fleet by four years — to no later than mid-2018, as compared to the previous goal of 2021. Increased efficiencies in new aircraft will jumpstart further fuel savings, Tammy Romo, executive vice president and chief executive officer at Southwest Airlines, told analysts and journalists during the company’s fourth-quarter 2015 conference call on Jan. 21.

Photo: Southwest Airlines

Over two-thirds of Southwest’s classic Boeing 737 fleet will be impacted by the accelerated retirement.

“Overall the internal rate of return on accelerating retirement of our classic fleet is estimated to exceed the return of investment ... of almost 21 percent. So it was a very easy decision for us,” said Romo.

Southwest ended 2015 with 704 aircraft in its fleet including the delivery of 19 new Boeing 737-800s and 24 pre-owned Boeing 737-700s, and saw the retirement of four Boeing 737 classic aircraft during the year. In December, the company restructured its future firm delivery schedule to include 33 additional 737-800s, and the conversion of its remaining 25 737-700 firm orders to 737-800s. The airline also added two pre-owned 737-700s to its delivery schedule.

“Our aircraft [Capital Expenditure] CapEx for 2016 is still estimated to fall in the $1.3 billion to $1.4 billion range, and our average aircraft CapEx for 2017 and 2018 combined is currently estimated to be in a similar range as 2015 which was very manageable. While the details of our Boeing agreement are confidential, the economics of our order book are very supportive of our continued fleet modernization efforts.”

The revised delivery schedule is currently estimated to raise the company's firm aircraft capital commitments by $400 million beyond 2015 by replacing older aircraft with more efficient and cost effective models.

“The accelerated retirement plan is estimated to produce cumulative EBIT improvement of approximately $200 million over the acceleration period, and that's primarily through maintenance and fuel cost savings,” said Romo. “And I'd also note that this incorporates the approximate $100 million in accelerated depreciation.”

As of now, Southwest Airlines has an average fleet age of 12.4 years, according to airfleets.net, a website that tracks the fleets of commercial airlines. This beats out a few of its other big U.S. competitors, including United Airlines, which has an average fleet age of 13.6 years, and Delta Air Lines, with an average of 17.1 years for its aircraft. American Airlines has the best of the big four U.S. airlines with 11.2 years as its average fleet age, but doesn’t even come close to Virgin America, which has an average of 6.4 years for its aircraft.

Southwest is on a path to reduce its overall fleet age in coming years and use the profits gleaned from lower oil prices to increase margins with new aircraft hitting the market, equipped with more fuel-efficient engines and avionics that can enable fuel-saving flight procedures.

The airline reported a net income of $2.4 billion in 2015, a huge jump when compared to $1.4 billion in 2014. The company also reported fourth quarter income of $591 million compared with fourth quarter 2014 net income of $404 million. Drops in energy costs, which the airline is banking on to fund further aircraft replacements throughout the next year at least, lifted 2015 profits significantly.

“Our annual 2015 economic fuel costs were $1.3 billion lower than 2014,” said Gary Kelly, Southwest’s chairman of the board, president, and CEO. “With energy prices near 12-year lows, and assuming current market prices, we are expecting another significant year-over-year decline in economic fuel costs in 2016.”

The company is still optimizing its retirement schedule over the next few years, according to Romo, but expects to end 2016 with roughly 720 aircraft.

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