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Southwest to Boost Fleet Efficiency

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Low cost carrier, Southwest Airlines Co. (LUV - Free Report) has ordered 85 split scimitar winglets from Aviation Partners Boeing (APB) that are expected to reduce its fuel consumption and augment the efficiency of its fleet. Notably, the company has been using APB’s blended winglets on its entire 737-800 fleet for the last 10 years.

The Dallas-based airline has ordered the new winglets for 52 of its existing The Boeing Co.’s (BA - Free Report) 737-800 aircraft and 32 new ones that are expected to be delivered this year. Southwest wants to add the latest winglet technology in its fleet by the first half of 2014 once APB receives the Federal Aviation Administrator’s clearance for using Split winglets in aircraft.

The sword-like split winglets will be added to its existing blended ones but will add new strengthened spars, aerodynamics scimitar tips and a large ventral stake. These modern aerodynamics in wings are expected to enhance Southwest’s fuel savings to 5% per aircraft by reducing drag. This translates into an annual savings of $14 million.

The Southwest contract strengthens APB’s split scimitar winglets– the most successful product in its history. Since its launch, the company has received 1,451 split winglet orders including 111 from Alaska Airlines Group Inc. (ALK - Free Report) in Oct 2013.

Fuel is a major expense for the airline industry and volatility of fuel prices is a lingering concern for the carriers. Southwest is also vulnerable to fuel price volatility as fuel makes up almost 35% of the company’s operating expenses. We believe enhancing fuel efficiency will reduce the company’s operating cost somewhat thus paving way for improved margins.

Fleet redesigning and reduced fuel expenses have aided Southwest’s third quarter 2013 earnings. Adjusted earnings of 34 cents per share surpassed the Zacks Consensus Estimate of 32 cents.  

Southwest currently carries a Zacks Rank #2 (Buy). Another stock worth mentioning within this sector is JetBlue Airways Corp. (JBLU - Free Report) which carries the same rank as Southwest.

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