Rumors are swirling that Southwest may acquire another carrier to cope with Boeing 737 delivery issues. But which one?
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Boeing’s 737-MAX 7 Delivery Issues Extend
Boeing’s drama is far from over, and airlines are taking matters into their own hands. United removed the 737 MAX-10 from its fleet plans in 2025 as the carrier lost faith that the manufacturer would be able to get the aircraft certified. The same concern is extending to a less discussed variant, the 737-MAX 7, for which Southwest anticipated receiving this year.
As of January 30th, Southwest was prepared to “roll with the punches” and wait until as late as 2026/2027 for the small, fuel efficient aircraft.
“Asked if there would still be room for the MAX 7 in the Southwest fleet if delivery was delayed to 2026 or 2027, he said: “Yeah, I think there is. … We really need that 7. We want it.” – Reuters
But increased scrutiny over Boeing’s operation by the FAA may and an announcement that the plane maker wants to make an adjustment to a key component has put certification in doubt for even that extended timeline.
“But Boeing said in January that it needs to redesign the Max 7’s engine anti-ice system, pushing back certification – already long delayed – another year.” – Flight Global
Southwest Airlines Pilots Preparing For Unannounced Merger, Acquisition
It seems that Southwest executives have changed their tune in less than eight weeks. In fairness to those executives, a lot has changed in that period which warrants cause for greater concern.
“Southwest chief executive Bob Jordan also criticised Boeing, saying it “needs to become a better company”.
“Murray says Southwest’s sole reliance on 737s brings “a level of risk” to the company, adding that recent events have left “many questioning if [the 737 Max 7] will ever be certified”.
““We watched our [seat capacity] grow and load factors decline due to a supply/demand imbalance caused by flying too large an airplane in certain markets,” Murray says. “We may have now reached the point where we are no longer able to place the right-sized aircraft into the correct network segment.” – Flight Global
Comments that the airline would have to “reassess business decisions” has the given the Southwest Airlines Pilots Association (SWAPA) doubts about waiting in perpetuity for the 737 MAX 7. The Southwest pilot union hired law firms on the heels of these statements to protect the labor group on seniority lists and for the business side of a deal to acquire another airline. Airline executives have stated outright that a switch to Airbus products would take years if it ever moved away from a 100% Boeing product and have not made any statements in official capacities that it is considering a merger or acquisition.
However, replacing 737 MAX 7s on lower demand, high-frequency, high-turn routes with larger 737 MAX 8s may have been a shortcut to future growth that hasn’t worked out for the carrier as it expected it might. That might have Southwest shopping for a solution by buying one.
Possible Targets
For a Southwest Airlines merger to be successful, one would have to believe that Boeing equipment and specifically smaller Boeing 737-700s would have to be part of the puzzle. Its last acquisition, AirTran Airways had a mixed fleet of Boeing 717s and 737-700s, of which the former were sold entirely to Delta and the latter were a catalyst for growth for Southwest.
This indicates that a mixed fleet acquisition target wouldn’t be a non-starter, it just doesn’t mean that Southwest will start flying A319s either. Not that Southwest would cut a check for an existing carrier, it would likely finance some or all of the deal, and exchange stock, but if it wanted to, Southwest had more than $11 bn cash on hand at the end of the last quarter. For the purposes of this exercise, I am looking at options below that number as a ceiling. Many of these carrier have debt that exceeds their market cap and a premium would have to be applied as well, it’s simply to provide some context.
- Sun Country
- This doesn’t immediately solve the 737-MAX 7 issue as its (54) jet fleet is entirely comprised of 737-800s, 12 of which are cargo and operate as Prime Air (Amazon) and one charter aircraft in an all-business class configuration of 76 seats. Another (5) 737-900ERs are due this year from Oman Air but none have yet arrived. That said, its market cap is just $736MM which even at a premium would be a cheap way to top up the Southwest fleet and remove a leisure market competitor in Minneapolis.
- Allegiant
- This is likely a non-starter as the current fleet of 126 aircraft are all Airbus. But it does have (24) 737-MAX 7 and (26) 737-MAX 200s on order of which it has already received the first. I can’t imagine this happening, but if Southwest were going to add Airbus at some point, this would be a quick way to do it. By the end of next year, (14) A320s were set for retirement. Current market cap is $1.32bn. The problems with an Allegiant acquisition are myriad and fleet is only part of that equation. Its top 5 airports are all in heavy Southwest markets but at secondary facilities. For example, Orlando (Sanford), Las Vegas, St. Petersburg/Clearwater for Tampa, Phoenix/Mesa, and Punta Gorda for Fort Myers. Southwest is huge at Orlando (MCO), Las Vegas, Tampa (TPA), Phoenix Sky Harbor (PHX), and reasonably large at Fort Myers (Regional Southwest – RSW.) It would be difficult to combine operations as such.
- Frontier Airlines
- For many of the same reasons as Allegiant, Frontier is an unlikely acquisition but could make sense if the carrier is going to move into Airbus at some point anyway, and avoid the risk of an any single manufacturer. Its large presence at Denver would help, Las Vegas too, but this would be strictly to expand with any similar sized plane and not necessarily a cultural merger. It has 135 Airbus A320 family aircraft and 203 on order, it will retire 29 of these between now and 2026. Market cap is $1.55bn as of publication.
- West Jet
- Southwest at one point codeshared with the Canadian discounter but buying a foreign competitor would be a regulatory struggle and Southwest would have to ditch 52 planes including (7) Dreamliners but it wouldn’t be hard to find homes for those. Current market cap $1.5bn USD.
- Spirit
- Without repeating the discussion around an Airbus fleet – if Southwest is going to do it at some point, Spirit is actually a great target. They have more aircraft coming onboard than in the fleet all of which will offer MAX level efficiency. With few exceptions, Spirit flies to large airports that Southwest either occupies or has recently migrated to like Chicago O’Hare, Miami, Houston Bush, and Dallas/Fort Worth. Southwest initially occupied secondary airports including hubs in the alternate each of those markets but has transitioned to adding flights to each of the majors as its market and customer base evolves. Spirit is relatively cheap at the moment with a market cap of $515MM
- JetBlue
- Facing financial hardship and performance issues, JetBlue could be an acquisition target as well with all of the same fleet challenges as Frontier, Spirit, and Allegiant. Market cap is $2.4bn at the moment.
- Hawaiian
- Alaska has a bid in for the carrier which has stated it is open to other bids as well. For market position it could make sense as Southwest has expanded to Hawaii and has done well, but there are just too many fleet mismatches to overcome.
- Alaska
- The best fit from a cultural and equipment perspective is Alaska with a market cap at $4.99bn. There are obvious challenges with this tie-up including a new membership in oneworld, the pending acquisition of Hawaiian, and if it’s 737-700s Southwest wants, of 314 aircraft, Alaska owns just 11. However, both are somewhat Mavericks, have been proudly all-Boeing aside from Alaska’s Virgin America acquisition and Horizon Embraers (84.) From a network perspective, it’s a good match too.
Regulatory Concerns
The biggest problem for any Southwest purchase is going to be DOJ approval. JetBlue’s Spirit acquisition was blocked by the DOJ because the two weren’t seen as serving the same market and thus, a unique independent, ultra low cost option for consumers would disappear. The question is how Southwest would be perceived. The nation’s largest domestic carrier and 6th by reported revenue (some state carriers do not release financial data) doesn’t belong to an alliance, doesn’t serve continents outside of North America – it doesn’t even fly to Canada – has all the hallmarks of a low cost carrier.
But Southwest is rarely the cheapest in the market even after adding in the ancillary charges for baggage, and drinks on other carriers. It’s a low cost carrier in name only and while the term “low cost carrier” was always meant to refer to the operational cost and not consumer charges, the two were synonymous for some time and still true for most in the category throughout the world.
What also remains to be seen is whether the Biden DOJ will allow *any* airline mergers at all. The JetBlue-Spirit case could have been blocked for a very valid reason in that Spirit is more critical to its market and should be preserved. However, the same DOJ blocked JetBlue’s Northeast Alliance with American Airlines while allowing Alaska to join/remain in the oneworld Alliance. Alaska and American Airlines codeshare and align to a much greater level including elite reciprocal benefits.
Additionally, the timeline for any approvals could be a very long time by which the 737-MAX 7 issue could be resolved anyway.
Conclusion
Boeing’s issues are affecting airlines that are dependent on deliveries, especially those who are brand captive. The airline industry is small and Southwest has few options for airlines to buy especially when looking at the unique Southwest offering. The regulatory environment will be far different than the mega mergers of years gone by like when Delta-Northwest combined forces, or United-Continental. But the union’s move and comments from Boeing executives shouldn’t be taken lightly. The carrier is likely evaluating options and which may include Airbus and may include buying something they otherwise would not. That said, no options are a perfect fit and only time will tell if Southwest decides to drastically alter the carrier as it is today.
What do you think?
