Southwest Airlines Co. (NYSE:LUV) has finalized a sale-leaseback transaction with Babcock & Brown Aircraft Management (BBAM) involving 36 Boeing (NYSE:BA) 737-800 aircraft, marking a significant move in its multi-year fleet monetization strategy. This strategy was first announced during the company's Investor Day in September 2024.
The Dallas-based airline, which concluded the sale-leaseback of 35 aircraft in late December 2024, received gross proceeds of $871 million. The company anticipates recognizing realized gains of $92 million in the fourth quarter of 2024 from this transaction.
These gains, which will be recorded within other operating expenses, were not included in the financial guidance update provided on December 5, 2024, and are expected to lower the company's cost per available seat mile for the fourth quarter and the full year of 2024, both on a Generally Accepted Accounting Principles (GAAP) and Non-GAAP basis. For deeper insights into Southwest's financial metrics and valuation analysis, investors can access the comprehensive Pro Research Report available on InvestingPro.
The lease terms for the aircraft will range from 26 to 37 months, during which Southwest will pay aircraft rents. The company expects aircraft ownership costs to increase by approximately $2.6 million per aircraft annually, as the aircraft rental expense will surpass previous depreciation expense levels.
The proceeds from this fleet strategy initiative, along with excess cash from the balance sheet, are intended to support Southwest's capital allocation strategy. This includes funding future fleet modernization efforts and delivering shareholder returns.
This news, based on a recent SEC filing, underscores Southwest's ongoing efforts to optimize its fleet and strengthen its financial position through strategic transactions. The sale-leaseback for the final aircraft in this deal is expected to be completed in January 2025.
In other recent news, the global airline industry is set to see significant financial improvements due to a 20% drop in Brent crude oil prices over the last year, according to a recent report by the International Air Transport Association (IATA).
This development is expected to reduce fuel costs, which account for 30% of total expenses for airlines, and boost net profits. The industry is also projected to surpass a revenue milestone in 2025, with revenues expected to exceed $1 trillion.
Research firm Bernstein has maintained a neutral stance on Southwest Airlines Co., despite the company's ongoing efforts to enhance its operations under the "Southwest. Even Better." initiative. Bernstein has increased the stock's price target from $30.00 to $33.00, citing early positive impacts of the plan. However, the firm has expressed caution, noting that significant advancements in the company's business model would require considerable time to implement and reflect in financial outcomes.
Morgan Stanley (NYSE:MS) has resumed coverage on Southwest Airlines Co., assigning the stock an Overweight rating and setting a price target of $42.00. The firm's forecast is based on Southwest's long-term average price-to-earnings ratio and the successful implementation of the airline's plan, coupled with its historical strengths.
American Airlines Group (NASDAQ:AAL) Inc. and Southwest Airlines Co. have provided positive updates, outperforming the S&P 500 and other sectors in the past week. Southwest Airlines has reported early successes in their business model adjustments. However, Goldman Sachs has reiterated its Sell rating on Southwest Airlines Co., while maintaining the price target at $28.00, amid stronger-than-anticipated leisure demand and the swift impact of revenue management strategies implemented by the company.
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