On January 7, Southwest Airlines announced that it reached an agreement with BBAM to execute an SLB transaction of 36 Boeing 737-800 aircraft.
In December 2024, the airline had already completed the sale of 35 of the single-aisle jets, promptly leasing them back from BBAM.
“The Company received gross proceeds of $871 million and expects to record realized gains in the amount of $92 million in fourth quarter 2024 for the sale-leaseback of these 35 aircraft.”
However, Southwest Airlines noted that the gains are expected to be recognized under other operating expenses – similar to Frontier Airlines – and were not included in its Q4 guidance update that it issued on December 5, 2024.
The carrier detailed that the SLB transaction represented an essential step in the execution of its multi-year fleet modernization strategy that it announced at its Investor Day in September 2024.
“Lease terms for the aircraft will range from 26 to 37 months, during which the Company will pay aircraft rents. Aircraft ownership costs will increase by approximately $2.6 million per aircraft, annually, as aircraft rental expense will exceed previous depreciation expense levels.”
Furthermore, transaction proceeds generated from the fleet strategy initiative, as well as excess cash from its balance sheet, should support Southwest Airlines’ capital allocation strategy.
This includes funding future aircraft purchases, including the Boeing 737 MAX 7 – when certified – and 737 MAX 8 , and providing shareholder returns.
In the December 5, 2024, guidance update, the airline said that it had actively pursued its fleet strategy, teasing that the transaction would be announced sometime in Q1 2025.
Southwest Airlines ended Q3 2024 with a net income of $67 million and $9.4 billion in cash and cash equivalents.
At the time, the company pointed out that it had a large base of unencumbered assets, with a net book value of around $17.1 billion.
This includes $14.2 billion in aircraft value and $2.9 billion in non-aircraft assets, such as spare engines, ground equipment, and real estate across the United States. Its net cash position was $1.4 billion.
“While that settles the issue, it effectively creates a significant pool of value that is trapped in our fleet and order book. While the growth targets have come down and therefore, so have the number of aircraft required, we intend to fully, and I mean fully liberate the significant value in our existing fleet and order book […].”
Tammy Romo, the executive vice president and chief financial officer (CFO) of Southwest Airlines, detailed that the airline’s unencumbered assets, including aircraft and the Rapid Rewards loyalty program, were valued at around $40 billion.
“And our existing fleet and order book with Boeing also have tremendous value that we intend to unlock as we moderate our capacity growth and manage our capital commitments. […] We have access to nearly 700 aircraft at the end of 2031 at attractive pricing, which is more than we need if we assume a steady [capacity – ed. note] growth rate of 1% to 2%.”
However, Romo reiterated Jordan’s comments that the carrier’s fleet strategy was not part of its core operations.
The airline will be opportunistic when it makes sense, and the CFO promised that even without the fleet strategy, it would be able to reach its return on invested capital (ROIC) goal of 15% by 2027.
