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Southwest won't fly 737 Max until 2020 as grounding hits airline earnings
[NEW YORK] Southwest Airlines on Thursday became the first US carrier to give up on seeing the Boeing 737 Max return to the skies this year, as the worldwide grounding of the top-selling aircraft dented quarterly profits for two major airlines.
Domestic-oriented Southwest said it has begun talks with Boeing about compensation for the impact from widespread flight cancelations and delayed deliveries of new planes that forced it to slow down its ramp-up of service to Hawaii.
American also has taken a hit amounting to US$400 million from the Max crisis but despite that both airlines reported higher second-quarter profits on strong consumer demand.
Boeing Max planes have been grounded since mid-March following two crashes that claimed 346 lives. Boeing has said it expects to win regulatory approval around October to resume flights, but has warned that the timeframe could be extended.
AMERICAN CONFIRMS MAX TIMETABLE
American reported an 18.9 per cent jump in second-quarter profits to US$662 million, as total revenues rose 2.7 per cent to US$12 billion.
Results also were dented by flight cancelations due to an ongoing dispute with maintenance workers and bad weather.
American now estimates the total impact of the Max grounding to be US$400 million for 2019, up US$50 million from the prior estimate.
Executives said they are were in close contact with the Federal Aviation Administration and Boeing and unlike Southwest still believe the plane will be ready to fly by November 2.
American's chief executive, Doug Parker, said he had "high-level" conversations with senior Boeing executives about compensation but did not discuss details of any payments.
American now anticipates capacity growth of only 1.5 per cent this year, down from 3.0 per cent because of Max cancelations, executives said.
BIGGER HIT IN Q3
Southwest reported a 1.1 per cent rise in profit to US$741 million, as revenues climbed 2.9 per cent to US$5.9 billion.
Southwest now plans to resume flights on the MAX on January 5, more than two months later than previously expected. The airline said it could take up to two months to resume flights once the plane is cleared by regulators to perform maintenance and to address FAA directives, including pilot training.
With its fleet of 34 Max planes, bigger than that of American or fellow rival United Continental, Southwest said it took a US$175 million hit to its bottom line in the second quarter due to the crisis.
Southwest chief executive Gary Kelly told CNBC the impact would be bigger in the third quarter because the company was due to receive 41 more Max planes this year "so our exposure with our route system grows again."
Boeing has set aside US$4.9 billion to compensate airlines for flight cancelations and plane delivery delays.
Southwest executives said on a conference call they believed both the FAA and Boeing have completed work on flight handling system that has been linked to both crashes, known as the Maneuvering Characteristics Augmentation System.
The focus is now on addressing a microprocessor identified during simulator testing.
Executives described the risk connected to the microprocessor issue as remote but said that the FAA's caution was understandable.
Mr Kelly said there was no evidence of criminal intent on the part of Boeing, which is under investigation by the US Department of Justice.
"There were judgments made about the remoteness of the risk and I think that's why Boeing behaved the way they did," Kelly said on the conference call.
"Boeing is a great company and Boeing is important to not just Southwest but our country," he said. "And they have a problem. They recognised the problem and I'm very confident they're focused on addressing the problem and taking care of their customers.
"So it's a tough situation and I have no doubt that mistakes have been made."
Pulling the MAX from Southwest's fleet delayed plans to ramp up service to Hawaii, which was one reason the airline slashed its target for seat capacity. It now expects to see that key benchmark fall by one to two percent this year, rather than growing by five percent as previously expected.
The airline also will cease operations at Newark's international airport to save money and shift all New York travel to LaGuardia Airport in New York City.
Shares of American dropped 5.6 per cent to US$32.67 in afternoon trading, while Southwest rose 1.9 per cent to US$55.73.