ANALYSIS: Southwest shuffles fleet, generating $89 million in Q2

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Southwest Airlines continues it fleet modernization program during the second quarter, moving the first of its 717-200s out of its active fleet, taking delivery of new Boeing 737 "next generation" aircraft and adding more seats to older aircraft.

In its second quarter earnings call on 25 July, Southwest's chief executive Gary Kelly says the Dallas-based carrier's fleet efforts generated $89 million in incremental revenue during the period.

Southwest reports an operating profit of $433 million during the quarter, down 6% from the same period last year. Operating revenue during the quarter was $4.64 billion, up from $4.62 billion.

Chief financial officer Tammy Romo says Southwest expects fleet changes will boost the airline's available seat miles by 2% in 2013 and add $300 million in earnings before interest and taxes during the year.

Those savings are expected as Southwest takes delivery of a planned nine new 737-800s during the second half of the year. The airline says those 175-seat aircraft are more cost-effective and fuel-efficient than older models.

During the second quarter, the Dallas-based carrier added three new -800s to its fleet, bringing to 43 the total number of the type, according to Southwest's second quarter 2013 securities filing.

All those aircraft have been acquired in the last 15 months.

Southwest Airlines and Southwest's Q2 2013 report

During the first half of the year, Southwest also acquired two used 737-700s on leases (those aircraft have not yet entered service), and agreed to lease 10 used -700s from WestJet, with deliveries in 2014 and 2015. In July the carrier also signed a lease to acquire two addition used -700s in 2014.

Southwest also converted one -700 from the fleet of subsidiary AirTran Airways into the Southwest's mainline fleet during the quarter.

Older aircraft get makeover

Southwest continues to outfit its fleet of -700s and "classic" 737-300s with its new "Evolve" interior. The retrofits include installation of six additional seats on the each aircraft, bringing the seat count on both types to 143, according to Southwest.

Southwest retrofitted 44 -700s during the second quarter, completing work on the type, and 14 -300s, according to regulatory filings. It expects to retrofit an additional 64 -300s by the end of the year.

Kelly says the airline has recently filled an average of 3.6 of the six extra seats on those aircraft, generating additional revenue at incremental costs that are "virtually nil."

717s head for the door

During the quarter Southwest began its transition back into a single-type operator, removing the first of AirTran's 88 717s from its active fleet. All those aircraft are headed to Delta Air Lines, which will acquire them over a three-year period starting in August.

Southwest has also retired one 737-500 and five 737-300s since January.

The airline says it will supplement lost capacity with new aircraft deliveries and by delaying retirement of more 737-300s and -500s, which have about 20 more seats per aircraft than the 717s.

Southwest ends the quarter with an active fleet of 87 717s, 123 -300s, 19 -500s, 424 -700s and 43 -800s, securities filings say.

The airline expects its next major fleet change will occur in 2017, when it plans to acquire the first 14 of 150 firm orders for the 737 Max 8. In 2019, Southwest expects to take delivery of 15 Max 7s, part of an order for 30 of the type.