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Southwest, American Detail Financial Effects of Max Grounding

Southwest, American Detail Financial Effects of Max Grounding

Southwest Airlines and American Airlines have confirmed the March 13 worldwide Boeing 737 Max grounding affected their profitability in 2019’s first quarter and both say they will experience a continuing financial impact while it remains in force.

In American’s first-quarter earnings conference call on April 26, chief financial officer Derek Kerr said the carrier canceled some 1,200 flights during the first quarter, but the 737 Max grounding didn’t cause all of the cancellations. Kerr said the flight cancellations reduced American’s first-quarter pre-tax income by $80 million and that the 737 Max flight ban, which forced American to ground 24 aircraft, accounted for about $50 million of that total.

However, with American canceling about 115 flights a day that its Max 8s otherwise would have operated until August 19, Kerr said the 737 Max grounding will have reduced American’s 2019 pre-tax profit by approximately $350 million by that date. Those 115 flights represent about 2 percent of American’s daily seat capacity in the second quarter, a period for which American has reduced its capacity-growth guidance to 0.7 percent as a result of the grounding. The $350 million bottom-line effect will arise because while its Max 8s remain grounded, American will lose all the revenue from the flights it has had to cancel while “most of the costs remain in place,” said Kerr.

Operationally, Southwest Airlines suffered through a much worse first quarter than did American, having had to cancel some 10,000 flights—or 4 percent of the carrier’s seat capacity during the quarter—for three main reasons: the Max grounding, bad weather, and a highly disruptive labor dispute with its mechanics union that resulted in hundreds of technical “write-ups” that required Southwest to take many aircraft out of service for unplanned maintenance events.

In Southwest’s first-quarter earnings call on April 25, CEO Gary Kelly cited a reduction of first-quarter net income by some $150 million due to operational issues, including a $60 million impact from leisure-travel booking softness throughout the first quarter arising from the U.S. government shutdown. The remaining $90 million effect from the flight cancellations Southwest experienced in the quarter resulted from the many unscheduled maintenance events the airline faced starting in February.

Southwest has revised downward to 2- to 3 percent its 2019 capacity-growth guidance because the Max grounding has forced it to cancel 160 flights a day until August 5. “Flight cancelations are expected to drive unit cost pressure for the duration of the Max groundings,” it said. However, one continuing effect the grounding will definitely generate lies in lost revenue opportunities for the carrier on its recently launched route network from California to Hawaii.

Southwest had planned to use 737 Max 8s for all of its California-Hawaii Etops flying from the time of its first Hawaii service on March 17, because of the new model’s superior range compared with that of the 737-800. However, the Max grounding has forced Southwest to operate the routes with 737-800s instead. Those jets cannot complete westbound nonstop flights carrying a full load of 175 passengers, forcing Southwest to leave several seats unsold, said Kelly.

Reference:   www.ainonline.com

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