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Flight Cancellations to Hurt Southwest’s Revenue Growth

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Jun. 20 2019, Updated 7:30 a.m. ET

Flight cancellations

Southwest Airlines (LUV) is facing massive flight cancellations due to the worldwide grounding of Boeing’s (BA) 737 MAX planes. Boeing 737 MAX series jets were grounded after two of the jets crashed within five months, killing 346 people.

The 737 MAX series jets are Boeing’s most advanced and fuel-efficient single-aisle aircraft, and therefore the majority of US air carriers own a significant number of this model jet. Southwest Airlines currently owns 34 such planes and has ordered 246 more.

Due to the worldwide grounding of 737 MAX jets, Southwest Airlines is recording approximately 100 daily flight cancellations, which account for ~2.5% of its over 4,000 daily flights.

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The company is already feeling the pinch of massive flight cancellations. During its first-quarter earnings release, Southwest Airlines noted 9,400 total flight cancellations of which 2,800 were due to Boeing’s troubled MAX jets. As a result, the company had recorded sluggish revenue growth of 4.2% in the first quarter, which was in contrast with the high-single-digit increase it had registered in the preceding two quarters.

In the second quarter, the company is anticipated to report over 9,000 flight cancellations due to MAX grounding. Therefore, analysts polled by Reuters are expecting the company to continue reporting sluggish top-line growth in the second quarter. Wall Street analysts’ revenue estimate of $5.97 billion reflects a year-over-year increase of ~4%, almost in-line with the first quarter.

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Other airlines

Other major US airlines are also facing massive flight cancellations due to Boeing’s troubled MAX jets. American Airlines (AAL), which owns 24 MAX planes, is recording 115 daily flight cancellations. The company on June 11 extended the MAX fleet cancelations to September 3. American Airlines expects that the removal of MAX planes from its scheduled fleets would have a negative impact of $350 million on its 2019 pre-tax income.

United Airlines (UAL), another major US carrier, has 14 MAX planes. During its first-quarter earnings release, the company had stated that it had to run larger planes on MAX routes, which is increasing its operating costs. Therefore, it is likely that massive flight cancellations will negatively impact the company’s second-quarter bottom-line results.

Southwest Airlines has gained 10.8% in the year so far and has outperformed the returns of the U.S. Global Jets ETF (JETS), which is up 9.1%. The ETF invests in aircraft manufacturers, cargo and passenger airlines, and airport and terminal services providing companies.

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