Southwest first airline to cut outlook after Boeing 737 MAX groundings
About 2,800 groundings are due to unscheduled maintenance and the 737 MAX saga; Boeing stock has tumbled 12.3% since the Ethiopia crash
Bengaluru — On Wednesday, Southwest Airlines became the first major airline to formally cut its financial outlook for the year after being forced to pull its new fleet of 34 Boeing 737 MAX planes out of service.
The Texas-based airline, which has struggled with maintenance problems and a harsh US winter, estimates it will have canceled 9,400 flights between mid-February and March 31, reducing growth in its number of available seats to just 1% compared to a year ago.
This compares with a forecast of about 3.5% to 4% in late January. The reduction also led it to cut growth in another closely watched measure — revenue per available seat mile (RASM) — by a full percentage point. Overall, it estimates it will lose $150m in revenue in the quarter compared to previous expectations.
“[We] experienced softness in passenger demand and bookings related to the government shutdown, resulting in an estimated $60m negative revenue impact in first quarter 2019,” Southwest said. “Trends have also been negatively impacted by more winter weather disruptions than expected, unscheduled maintenance disruptions, further softness in leisure-oriented passenger demand and yields, and the MAX groundings.”
Southwest also now estimates first-quarter unit costs to increase about 10%, compared with its previous forecast of about 6% because of flight cancellations. This figure excludes fuel costs and profit-sharing expenses.
Shares of Southwest were up 2% at $49.70, reversing earlier losses.
US airlines and manufacturers, along with Wall Street, have been slow to estimate losses from the fall-out of the Ethiopian Airlines crash on March 10, which killed 157 and led to the worldwide grounding of Boeing’s new MAX jets.
Southwest said of its expected cancellations, about 3,800 would be weather-related and about 2,800 due to unscheduled maintenance disruptions and the grounding of the 737 MAX 8.
Its larger rival, American Airlines, has so far said only that it was cancelling about 90 flights a day as a result of the grounding of its own 24 Boeing 737 MAX planes. The third-biggest US carrier United Airlines has 14 of the planes.
“The impacts associated with the MAX are contained to Southwest, American, and United, though are most acute for Southwest as per today’s update,” Morgan Stanley analyst Rajeev Lalwani said.
Tough April for airlines
This week, Boeing is briefing airlines on software and training updates for the MAX, with more than 200 airline pilots, technical experts and regulators from around the world due to visit the Washington, facility where the 737 is assembled.
As well as approval from the US Federal Aviation Administration (FAA), any MAX software fixes will need a green light from governments around the world, which could take months.
While shares of the world’s biggest plane manufacturer have fallen about 12% since the March 10 crash, Wall Street has been slow to predict major financial implications.
“[Our] base case is a multiple-month grounding punctuated by a manageable fix; meaning the stock can resume its move into the $400s with a path to more than $500,” analysts from US bank Citi said.
Another Wall Street analyst, Cowen’s Cai von Rumohr, said most of the immediate impact on airlines is likely to be in March and April given the leisure-oriented spring break travel period.
“We still see a tough first quarter, marred by the government shutdown, weather, and MAX grounding; and the second quarter will be affected throughout at least April, probably longer,” he said.
Boeing is due to brief pilots and a US senate hearing with the FAA later on Wednesday. Boeing shares were marginally down at $370 on Wednesday. Since the Ethiopian Airlines crash on March 10, the stock has tumbled 12.3%.