Together, three major US air carriers, Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL), own 72 Boeing (BA) 737 MAX planes. The airlines have already lost billions of dollars in revenues and operating profit. There has been a global flying ban on the MAX jets since mid-March. The three big US airlines will likely feel more pain. There’s uncertainty about Boeing receiving regulatory safety approval for the MAX aircraft in the near term.
Boeing MAX crisis hit airlines’ capacity
According to the latest data compiled by OAG, the leading digital airline information and data provider, there are new issues with these three airlines. The data suggests that these air carriers suffered from massive capacity losses during the peak summer season. The research report compared the capacity as of Monday with air carriers’ planned capacity as of February 18.
According to the report, Southwest Airlines has lost approximately 2.96 million seat capacity since the MAX grounding. The company owns 34 of the planes. American Airlines has a capacity loss of nearly 2.19 million, while United Airlines has a capacity loss of 1.19 million seats. American Airlines and United Airlines have 24 and 14 Boeing 737 MAX aircraft, respectively.
OAG estimates that the cost of the MAX grounding on US airlines could reach $4 billion if the aircraft resumes service by November. However, industry experts aren’t optimistic. They expect the MAX grounding to drag on through January 2020. The three big US airlines would witness a substantial negative financial impact in the second half of 2019.
Globally, OAG’s report states that airlines’ capacity loss has crossed over 41 million since the MAX grounding in mid-March. China Southern Airlines has suffered the most with a capacity loss of over 3.65 million. Before the MAX fiasco, OAG expected the global airline industry to generate a profit of approximately $28 billion in 2019. However, with US air carriers losing over $4 billion alone, the global profit figure will likely decline significantly. Notably, more than 370 Boeing MAX aircraft were in operation before the MAX fiasco.
Boeing MAX fiasco hurt airlines’ financials
The three US airlines have reported sluggish revenue growth in the second quarter due to massive flight cancellations. According to Southwest’s second-quarter earnings release, it has faced over 20,000 flight cancellations due to the MAX troubles. The company’s second-quarter revenues of $5.91 billion fell short of analysts’ expectation of $5.94 billion. The YoY growth rate of 2.9% was significantly lower than over a 5% increase reported in the previous three quarters.
American Airlines faced nearly 7,800 flight cancellations in the second quarter, which resulted in a 0.8% YoY decline in the overall capacity. The company’s quarterly revenues of $11.96 billion were in-line with analysts’ estimates. However, the YoY increase of 2.7% was lower compared to more than 5% growth recorded in all four quarters of 2018.
United Airlines registered approximately 3,440 flight cancellations during the second quarter. Revenues of $11.4 billion for the quarter beat analysts’ estimate of $11.36 billion. However, the YoY growth rate slowed down to mid-single-digits from high-single-digits in the previous five quarters.
We think that higher ticket prices drove the YoY revenue growth. In June, JPMorgan Chase (JPM) revealed that airlines increased ticket prices twice in the first half of 2019, according to a Bloomberg report. The report specified American Airlines, Southwest Airlines, and Hawaiian Holdings. If the airlines hadn’t raised their ticket fares, their second-quarter top-line performance would have been more disappointing.
Uncertainty looms over Boeing MAX’s return
Previously, Boeing expected to get regulatory safety approval for MAX planes in early July. Therefore, industry experts expected that airlines could resume services by October after necessary maintenance work and pilot training. However, finding a new software glitch in late June lowered the expectation of MAX’s quick return to service.
Boeing plans to fix the problem by the end of September. That said, regulators around the world would take several weeks to test and certify the system. Airlines would take another three to five weeks for necessary maintenance work and pilot training.
Therefore, airlines probably won’t be able to resume MAX services this year. Citing the uncertainty, Southwest Airlines, American Airlines, and United Airlines have extended the 737 MAX flight cancellations through January 2020.
Airline stocks’ performance
So far, 2019 hasn’t gone well for airline stocks. Most of them have lower or even negative returns. The U.S. Global Jets ETF (JETS), which tracks the performance of cargo and passenger airlines, has gained 6.6% YTD (year-to-date). On the other hand, the Dow Jones and S&P 500 indexes have risen 11.5% and 15%, respectively. Southwest Airlines and United Airlines stocks have returned 7.4% and 3.3%, respectively, YTD. In contrast, American Airlines has lost 10.8% of its value during the same period.
The airline industry has grappled with negative news throughout the year. At the beginning of the year, harsh weather conditions and the partial government shutdown in January disrupted business operations. The worldwide flying ban on Boeing’s 737 MAX planes in mid-March caused massive flight cancellations for Southwest Airlines, American Airlines, and United Airlines. The YTD performances also reflect investors’ concerns about a possible global slowdown and uncertainty regarding US-China trade negotiations.