How Southwest Could Deploy a Larger 737 for Greater Profits in New Markets

Now that the pilots and flight attendants have both come to an agreement with Southwest (LUV) on terms to fly a larger 737 airplane from Boeing, the airline has to figure out exactly how it wants to use it. My guess? This airplane is perfect for helping Southwest better serve crowded airports and leisure destinations.

Right now, the bulk of Southwest's fleet is made up of the 137-seat 737-700 airplane. A few months ago, Southwest decided that it was interested in pursuing the 737-800, a stretched version that would seat about 175 people. With labor onboard, it's all but a done deal that these airplanes will start showing up on the property in early 2012. But why does Southwest even want them?

When I was at Southwest's Media Day in late October, CEO Gary Kelly mentioned that the -800 would allow Southwest to look at Hawai'i. Of course, other airlines have flown the -700 to Hawai'i, so Southwest could presumably do the same. I asked for clarification and was told that the airline can, technically, but it doesn't think it can profitably serve Hawai'i with the -700.

The -800 is a great airplane because it adds seats for a relatively low marginal cost. This means that on a per seat basis, the -800 is cheaper to operate than the -700. On the flip side, Hawai'i is expensive in general. It requires extended overwater operations certification that Southwest doesn't have today, and it requires carrying a ton of extra fuel in case of trouble. Fuel is heavy, and that means it costs a lot to carry.

Plus, Hawai'i is a leisure market, so fares tend to be lower than in heavy business markets. So, Southwest looked at the numbers and decided that the per seat costs on the -700 would be too high considering the fares that it could get. But the -800 is a different story. Southwest hasn't said it will go to Hawai'i, but the fact that it's even talking about it should be considered a sign.

But the -800 won't only be good for Hawai'i; it will probably enable the airline to serve other leisure destinations where the demand is high but the fares aren't. The Caribbean and Florida are good places for this airplane.

There is, however, another good market opportunity and that's in airports with severe constraints. Southwest is now flying to New York/LaGuardia, with Newark coming soon. It will go into Washington/National with its AirTran (AAI) purchase. These are markets where Southwest has very few slots at its disposal. Because of that, it can't adequately meet the demand that's out there. Southwest can't add flights, so what's the only other way to serve more people? Use a bigger airplane.

While the 737-800 isn't likely to be the backbone of the fleet anytime soon, it's likely to be a great niche airplane to help expand the route network further.

Related:

• Southwest Pilots Have Tentative Deal to Fly Larger Airplanes
• Southwest Pilots Chime in With Caution on New Aircraft Purchase
• Flight Attendant Demands May Block Southwest's Push Toward Bigger Planes