Southwest Airlines has signed a sale-and-leaseback (SLB) agreement with Babcock & Brown Aircraft Management (BBAM) to sell and lease 36 Boeing 737-800 aircraft.
Raising over $871 million.
Southwest Airlines and BBAM signed an SLB deal for 36 Boeing 737-800 aircraft on January 7. In December 2024, the airline sold 35 of the single-aisle planes and subsequently leased them back from BBAM.
Southwest Airlines, like Frontier Airlines, expects the profits to be reflected in other operating expenses and did not include them in its Q4 guidance update on December 5, 2024.
As a result, the airline’s Q4 2024 and full-year cost per available seat mile (CASM) will decrease year on year (YoY). The transaction for the 36th aircraft is expected to close in January, according to the carrier.
Executing its strategy.
The carrier stated that the SLB deal was a critical step in implementing its multi-year fleet transformation strategy, which it outlined at its Investor Day in September 2024.
Furthermore, transaction revenues from the fleet strategy initiative, as well as surplus cash on the balance sheet, should help Southwest Airlines’ capital allocation strategy.
This involves supporting future aircraft purchases, such as the Boeing 737 MAX 7 (when certified) and 737 MAX 8, and generating shareholder returns. In its December 5, 2024 outlook update, the airline stated that it had vigorously pursued its fleet plan, hinting that the transaction will be disclosed in Q1 2025.
Southwest Airlines concluded the third quarter of 2024 with a net income of $67 million and $9.4 billion in cash and cash equivalents.
At the time, the corporation stated that it had a huge base of unencumbered assets, with a net book value of around $17.1 billion.
This comprises $14.2 billion in aircraft value and $2.9 billion in non-aircraft assets, such as spare engines, ground equipment, and real estate in the United States. Its net cash balance was $1.4 billion.
Shareholder returns.
During Southwest Airlines’ investor day in September 2024, CEO Bob Jordan, whom Elliott Investment Management wanted to remove, explained that while Boeing’s delivery delays caused issues, they also created an opportunity for the airline by providing future delivery credits.
Southwest Airlines’ CFO, Tammy Romo, estimated that the airline’s unencumbered assets, including planes and the Rapid Rewards loyalty program, were worth approximately $40 billion.
However, Romo maintained Jordan’s point that the carrier’s fleet strategy was not part of its primary activities. The airline will be opportunistic when it makes sense, and the CFO has pledged that even without the fleet strategy, it will be able to meet its 15% return on invested capital (ROIC) goal by 2027.
What is a sale-leaseback agreement?
A sale-leaseback agreement is a financial arrangement where an owner sells an asset, like an aircraft, and then leases it back from the buyer to continue using it.
Why did Southwest Airlines opt for a sale-leaseback?
Southwest Airlines entered into a sale-leaseback to improve its financial flexibility, reduce upfront costs, and maintain access to the aircraft for operations.
How many aircraft are included in this agreement?
The agreement includes 36 Boeing 737-800 aircraft owned by Southwest Airlines.
What are the advantages of a sale-leaseback in aviation?
Sale-leasebacks provide immediate liquidity, reduce ownership risks, and allow airlines to use the funds for other business needs while still operating the aircraft.
Who are the potential lessors in this deal?
The identity of the lessors was not disclosed by Southwest Airlines, but they are likely financial institutions or leasing companies specializing in aviation.