How Boeing Wins From Contract Between Southwest and Its Pilots

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Southwest Airlines Co. (NYSE: LUV) and its pilots’ union, Southwest Airlines Pilots’ Association (SWAPA), reached an agreement in principle Monday on a new contract. The previous contract expired almost exactly four years ago, and the new contract, if it is ratified by the approximately 8,400 pilots in the union, runs through August 2020.

Among the many issues in dispute through the negotiations was the incorporation of the new 737 MAX from Boeing Co. (NYSE: BA) into Southwest’s fleet. The airline, which currently flies only Boeing’s 737, is the launch customer for the 737 MAX and has ordered 200 of the planes.

According to Boeing’s latest report, Southwest has 239 unfilled orders for 737s, including 200 of the 737 MAX and 39 737-800s. Southwest has taken delivery of 702 Boeing 737s over the years. Southwest took delivery of its first 737 in June of 1971.

Where Southwest and its pilots figure in needs a bit of explanation. The federal Railway Labor Act, which also applies to airlines, requires that during contract negotiations both sides maintain the status quo. The union argued that because the new planes are not listed in the expired contract, the 737 MAX cannot be flown until a new contract had been negotiated.

Southwest argued that the new plane is no different from other planes already listed in the previous contract except for their new engines. Therefore, the new planes do not need to be specifically named in a new contract.

According to a report at Airways magazine, the agreement reached this week stipulates that “any aircraft with more than 175 seats or that requires a different type rating will drive a re-opening of negotiations until the new contract covers the additional variants.”

Had Southwest and its pilots not reached a new agreement, the airline, which has been retiring older 737s in anticipation of receiving 737 MAX replacements beginning in March 2017, would likely have had to stop the retirements or acquire used 737s.

According to a report at Leeham News, Southwest would have had to pay Boeing for the planes, but the planes would then have had either to sit on the tarmac in Seattle or be flown to the desert for storage until Southwest’s contract with SWAPA was renewed.

In late June, Southwest said that it will delay delivery of 67 new 737 MAX planes until at least 2023, with the last deliveries scheduled for 2025. The original delivery period ran from 2019 through 2022. Without a contract with its pilots, Southwest almost surely would have asked Boeing for some accommodation on payment and may even have delayed more deliveries. That would have been bad news for Boeing’s cash flow.

SWAPA officials are scheduled to meet later this month to decide whether to put the agreement to a vote of its members. If the contract is put to a vote, there is a 30-day voting period, which means the voting would end in early November.

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