Southwest Appetite for B737-700 Wanes Potentially Affecting Values

June 11, 2018

With the fleet of B737-700s being dominated by Southwest and in view of the very limited number of orders being placed for the type over the last decade, there exists a danger that used values will suffer as more come onto the market.

Of the approximate 1,000 B737-700s in service nearly 50 percent are operated by Southwest Airlines. Westjet is the next largest operator with 56 aircraft and United with 39. The operator base is diverse with some 95 operators of the type. Nonetheless, the 500 of Southwest are being retired with the divestment of the -700 being accelerated as more -8s enter service. Southwest has announced that 40 are to be retired as some 60 -8s are delivered this year. The 23 MAX7s ordered by Southwest have already been deferred by four years clearly indicating that just as the market structure failed to maintain interest in the B737-500 then so too is the demand for the B737-700 limited. The retirements announced by Southwest are occurring earlier than was seen for the B737-300 which were operated for some 25 years. The operator has increasingly switched to the larger B737-800 and -8 in the last decade. Although some used -700s have been leased by Southwest in recent years, there has been a notable shift away from the type. As the -700 fleet contracts there will be of a less business case to retain the type which could see retirements accelerate even more. The airline has announced that revenues in the second quarter have been affected by the engine failure on one of its B737-700s in April which could see new aircraft being used more as replacement rather than growth capacity.

The values of the -700 have been falling as the market has become less enthused about the type. Two years the value of a 2003 -700 approximated $15.5 million – today the same aircraft is fortunate to have a value of $12 million representing a fall of more than 20 percent. With the majority of B737-700s having been delivered in the first decade of B737NG production – 1997-2007 – this suggests that other operators will increasingly look to replace their existing aircraft with larger types. The effective ending of production some years ago raises the prospect of value convergence, whereby the values of the youngest aircraft fall at a faster rate than the older eventually leading to little differentiation in value due to age. The value of a new -700 has barely moved from $35 million for a decade and this lack of increase is having a further negative effect on the values of used aircraft even if lease rentals have remained relatively stable. The potential acceleration in -700 retirements by Southwest will add to the negative factors affecting the type such that within five years the value of a 2003 aircraft will have fallen by another 50 percent to less than $6 million representing scrap levels.


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