The ripple effects of the worldwide flight ban of the Boeing 737 MAX continue to spread and cause financial harm. One day after Boeing Co. (NYSE: BA) declared that it would temporarily shut down the troubled plane’s production line in January, Southwest Airlines (NYSE: LUV) said it is removing the MAX from its flight schedule through April 13.
In a Dec. 17 regulatory filing, Southwest said fourth quarter non-fuel costs were expected to increase 4% to 6% compared to the same period a year ago primarily because of the MAX groundings. Full-year passenger-related costs are projected to increase 8%. It said fuel efficiency is expected to decrease on a per passenger basis by 1% to 2% because of the removal from service of the MAX, its most fuel-efficient plane. Passenger capacity is on track to dip 1% compared with the previous guidance of 0.5% to 1%.
Southwest said it has canceled about 3,000 flights in the quarter so far due to winter weather, but that they won’t have a material impact on financial results.
The company maintained revenue guidance at flat to up 2%.
Southwest has 34 737 MAX 8 aircraft in its fleet that have been grounded by regulators since mid-March following two deadly overseas crashes blamed on poor design of the aircraft’s automated flight control system and lack of pilot training with the system. In addition, the Dallas-based airline has 41 MAX aircraft on order from Boeing or aircraft leasing companies this year that have been delayed. Southwest previously adjusted its flight schedule through March 6.
The Boeing and Southwest moves were precipitated by the length of time it is taking the Federal Aviation Administration (FAA) to review Boeing’s software fixes and upgraded pilot training procedures. Boeing and the airline industry had expressed hope that the process would be completed by December, but last week the FAA said the certification for return to service won’t happen until next year.
American Airlines immediately said it was pushing back its MAX schedule through April 7.
Some observers say the FAA’s decision likely won’t happen before February.
As previously reported, Southwest reached an agreement for an undisclosed amount of compensation from Boeing related to operational and lost opportunity costs associated with the unavailability of the MAX. Southwest said it will give $125 million of that amount to its employees through its profit-sharing plan, and distribute it next quarter. It said it continues to negotiate for more compensation for damages related to the MAX grounding.
Southwest said in its third quarter earnings that the MAX grounding caused a $435 million reduction in operating income for the first nine months of the year.
Airlines and their customers aren’t the only ones feeling the pain from Boeing’s problems with the MAX. The halt in MAX production will also reduce cash flow to hundreds of Boeing suppliers. Boeing said it is not laying off or furloughing any workers, but that could change the longer it takes for the airplane to get cleared for commercial service. Boeing is the nation’s largest manufacturing exporter and any loss of cash flow throughout the supply chain could end up being felt by workers and the communities where they spend their money.
The 737 MAX has modest value from an air cargo perspective because it is a single-aisle plane. But Southwest has an all-737 fleet, primarily offering domestic service, and is very active in freight, moving about 200 million pounds of mail and cargo per year.
