Southwest Airlines (LUV) is in advanced discussions with Boeing and aircraft lessors to buy up to 30 of the planemaker’s 737 Max jets, which have lost their original buyers, Bloomberg reported. Shares of both Boeing and Southwest are up by more than 3% in Tuesday’s pre-market trading.
According to the report, any of the aircraft that Southwest accepts from storage at Boeing (BA) would replace a similar number of the 249 planes that the airline has already ordered. The talks are part of a broader effort by Boeing to generate cash from its best-selling 737 Max jet, which has been grounded since March 2019 after two fatal crashes.
In addition, the ailing planemaker has approached United Airlines, Alaska Air Group and Delta Air Lines to spur interest in the planes that have no buyers, and which are also known as “white tails”. Of the 450 or so Max built during the flying ban, nearly a quarter are white tails, Bloomberg has learnt.
While, the coronavirus travel restrictions have resulted in a deep cut in the number of commercial jets and services Boeing customers need over the next few years, those able to negotiate deals, might benefit from better terms on models that will lower fuel and maintenance costs as they prepare for the eventual rebound in commercial flying.
“Although we have nothing new to share today regarding fleet plans, we’ve publicly shared that Southwest is currently working with Boeing to refresh our order book,” the airline told Bloomberg in a statement. Boeing declined to comment, as did United and Delta.
Shares of BA closed 13% higher on Monday, trimming this year’s decline to 45%. The airline recently said that it expects passenger traffic to return to 2019 levels in only about 3 years. As a result, the US plane maker will need to continue with overall staffing cuts through natural attrition as well as voluntary and involuntary workforce reductions. (See BA stock analysis on TipRanks)
Cowen & Co analyst Cai Rumohr on Oct. 28 reiterated a Hold rating on the stock with a $150 price target (16% downside potential), saying that it’s still early to step back in to the stock.
“Increases in MAX and 787 inventories should become a source of cash starting in Q4 as deliveries start to ramp,” Rumohr wrote in a note to investors. “But delivery plans are fluid and there’s risk of additional downward adjustment to production plans. Because a major portion of expected positive cash flow in 2022-23 will come from inventory burnoff, the stock may drift until a delivery floor is in clear focus.”
The rest of the Street has a cautiously Moderate Buy analyst consensus on the stock. That’s with a $179.38 average analyst price target, suggesting that shares are fully priced at current levels.
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