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Southwest Airlines enters sale-leaseback deal for Boeing planes

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Southwest Airlines enters sale-leaseback deal for Boeing planes
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Southwest Airlines has entered into a sale-and-leaseback agreement with Babcock & Brown Aircraft Management (BBAM) involving 36 Boeing 737-800 aircraft. The airline announced on January 7 that it had already completed the sale of 35 jets in December 2024, which were then leased back from BBAM.

"The Company received gross proceeds of $871 million and expects to record realized gains in the amount of $92 million in fourth quarter 2024 for the sale-leaseback of these 35 aircraft," Southwest Airlines stated. These gains are expected to be recognized under other operating expenses and were not included in its Q4 guidance update issued on December 5, 2024.

The transaction is anticipated to impact the airline's cost per available seat mile (CASM), resulting in a year-on-year decrease for Q4 2024 and the full year. The deal for the remaining aircraft is expected to conclude this month.

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This move aligns with Southwest Airlines' fleet modernization strategy outlined during its Investor Day in September 2024. "Lease terms for the aircraft will range from 26 to 37 months, during which the Company will pay aircraft rents. Aircraft ownership costs will increase by approximately $2.6 million per aircraft, annually, as aircraft rental expense will exceed previous depreciation expense levels," explained Southwest Airlines.

Proceeds from this transaction, along with surplus cash reserves, are intended to support future aircraft purchases such as Boeing's upcoming models once certified, as well as shareholder returns. As of Q3 2024, Southwest reported a net income of $67 million and held $9.4 billion in cash and equivalents.

During an investor day event, Bob Jordan, CEO of Southwest Airlines, emphasized plans to unlock value trapped within their existing fleet due to Boeing's delivery delays: "While that settles the issue, it effectively creates a significant pool of value that is trapped in our fleet and order book."

Tammy Romo, CFO of Southwest Airlines, added that their unencumbered assets were valued at around $40 billion: "And our existing fleet and order book with Boeing also have tremendous value that we intend to unlock as we moderate our capacity growth and manage our capital commitments."

Romo assured stakeholders that even without pursuing aggressive fleet strategies, they aim to achieve a return on invested capital (ROIC) goal of 15% by 2027.

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