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Southwest Analysis: Profits Up, Large Classic 737 Retirement On The Horizon

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Southwest Airlines made $511 million in first quarter and its pilots would like their new contract settled by getting a bigger piece of the pie.

Southwest Airlines last week announced better-than-expected first-quarter profits – clearing $511 million – as Southwest is benefiting from the same factors driving up profits for the industry – low fuel cost and high load factors.

At the same time, Southwest announced it is accelerating plans to retire the 737-300s in its fleet. The original time line had those planes coming off line in 2022, then it was moved to 2018. Now, Southwest President and CEO Gary Kelly announced that the company plans a “hard stop” and will take place a year earlier.

“This is a viable and manageable solution, although not preferred,” Kelly said in a statement. “This accelerated retirement of the Classics will result in fewer aircraft and lower available seat mile growth in 2017 than previously planned.”

That means that over 100 737-300s will be retired over the next 18 months.  This is in addition to the remaining 12 737-500s that are scheduled to be retired by the end of September of this year.

Why would Southwest pump the brakes on growth?

News of this type never happens in a vacuum and the report of record profits along with taking approximately 50 of the 737 Classics out of action invites some between-the lines thinking.

The airline industry rides a roller coaster of cycles and right now the ride has reached the top. Profits are high as the price of oil (and jet fuel) is at record lows. Coupled with most flights departing at near capacity, profits are up.

Southwest and its pilots have been trying to agree to a new contract. The pilots have been working under a deal signed in 2012 that expired three years ago. They are seeking compensation that would rank as the highest in the industry plus have the company make larger contributions to retirement plans.

With Southwest reporting high earnings, the pilots obviously believe they deserve a cut. No pilots, no profits.

Kelly said it’s not meant to be a warning shot at pilots…

The announcement to move up the retirement of the 737-300s could be interpreted as a warning shot by Southwest. Kelly denied that theory.

“This is not a shot (at the pilots’ union,” Kelly said. “Contrary to the way our industry has worked in the past, this is not the way we do business here at Southwest. We’re here to take care of our people. Clearly accelerating this retirement is not a good thing for our employees. It’s not a bad thing either. We’re not at war with our people. We’re at war with our competitors.”

One of the reasons Southwest is pulling the 737-300s out of service is that delivery of the new Boeing 737-8 MAX aircraft is expected to be head of schedule. Those aircraft are more fuel efficient and carry more passengers – a win-win for Southwest.

However, the pilots’ union says the MAX isn’t listed in the current labor agreement as an aircraft they can fly. Southwest disagrees.

“They cannot fly the MAX without a new contract,” said Jon Weaks, the union’s president.

Another twist in the story involves the Federal Aviation Administration. The agency has yet to decide on the training needed for pilots flying the MAX. If the FAA says that pilots cleared to fly the current 737-800 (the MAX’s predecessor) can fly the MAX, then the Southwest pilots will lose negotiating leverage.

“We have been working with our pilots’ union, Southwest Airlines Pilots’ Association, to mitigate this issue through segmenting the classic flying, but that effort has been unsuccessful,” Kelly said. “Given the FAA is not expected to complete training requirements until next year, the only solution now is to avoid flying both the classics and the MAX (at the same time).

“We have to have every pilot trained to sit in every cockpit. It’s all or nothing.”

Southwest expects to receive its first plane in the third quarter of 2017, while Boeing says the delivery may come sooner.

“It’s a freight train coming down the track,” said Casey Murray, the head of the Southwest pilot union’s negotiating committee, said in an interview. “We can see the light and they can, too.”

Written by Wendell Barnhouse

Wendell Barnhouse is a veteran journalist with over 40 years of experience as a writer and an editor. For the last 30 years, he wrote about college sports but he has had an interest and curiosity about aviation since he was in grade school.

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