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Southwest’s Pilot Union: MAX Crisis Might Last until March

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On Monday, Southwest Airlines’ (LUV) pilot union warned that the airline might not resume Boeing (BA) 737 MAX services in January 2020. The association expects that the grounding might last until March, according to an Associated Press report. Notably, Boeing’s 737 MAX planes have faced a global flying ban since mid-March following two deadly crashes within five months.

During a meeting, the union president, Jon Weaks, said, “We think we’re looking at maybe even February or March.” The Associated Press report revealed that the pilot union highlighted several reasons for the assumptions. They pointed out the “pilot-training requirement and possible changes to checklists” as the main reasons, according to the report.

The union’s expectations are in contrast to Southwest Airlines’ timeline. The company will likely resume MAX services in early January. During a Cowen & Company conference event on September 4, the company said that it expects Boeing to get regulatory approval before Thanksgiving in the US.

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According to a Bloomberg report, Southwest assumes that it will take 45–60 days to resume MAX services following regulatory certification. The airline expects that each grounded MAX plane will require an average of 120 staff hours to get ready to fly. However, the pilot union expects an average 200 hours for each MAX aircraft, according to Bloomberg.

MAX problem hurt Southwest’s financials

The worldwide grounding of Boeing MAX planes impacted Southwest’s financials. In the US, Southwest is the largest Boeing MAX operator in the US with 34 of the aircraft. The airline removed all of its MAX fleets from the flying schedule until January 5, 2020. The grounding caused more than 200 daily flight cancellations.

During the second-quarter earnings release, the company revealed that it faced over 20,000 flight cancellations due to the MAX fiasco. The massive flight cancellations weighed on Southwest Airlines’ second-quarter seating capacity and pre-tax income. The company’s overall seating capacity fell 3.6% YoY in the second quarter. Southwest’s unit cost rose 7.5% YoY to 12.36 cents during the quarter.

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The airline said that the grounding of Boeing MAX jets had a negative impact on its second-quarter pre-tax income by $175 million. Southwest expects its overall capacity to fall 2%–3% in the third quarter and 1%–2% in fiscal 2019. The company expects the unit cost to rise 8%–10% in the third quarter due to reduced capacity. If Boeing MAX 737 planes remain grounded longer, it will hurt Southwest Airlines’ financials.

Peers feel the pinch too

Southwest isn’t the only US air carrier that’s feeling the pinch of the Boeing MAX problem. American Airlines (AAL), which owns 24 MAX aircraft, is facing 115 daily flight cancellations. In the second quarter, the airline reported 7,800 flight cancellations and took a $175 million hit in pre-tax income. American Airlines expects the MAX grounding to have a negative impact on its 2019 pre-tax income by $400 million.

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Currently, United Airlines (UAL) has 14 Boeing MAX planes. The company recorded 3,440 flight cancellations in the second quarter due to the flying ban. Last month, United Airlines extended the grounding of MAX jets until December 19. The airline expects the total MAX cancellations to reach 9,500 until December 19.

MAX issue impacted Southwest’s expansion plans

Boeing’s MAX crisis is also impacting Southwest Airlines’ expansion plans across its new Hawaiian Island route. Notably, the airline received regulatory approval to fly its planes across the Hawaiian network starting in March. Previously, the company planned to only fly Boeing MAX planes on the route due to fuel efficiency. Southwest planned to expand its services in the region with the delivery of 41 Boeing MAX jets this year.

However, the company couldn’t receive the new planes due to the flying ban, which delayed its expansion plans. Since uncertainty still looms over the MAX 737’s return, Southwest decided to expand in the region with its older fleets of Boeing 737–800 aircraft.

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Stock performance

Southwest stock rebounded after it took a hit from the government shutdown, the Boeing MAX crisis, and mechanics’ contract dispute. With a YTD (year-to-date) return of 16.2%, the stock has outperformed the Dow Jones Index and its industry peers. The Dow Jones has gained 15.4%, while the iShares Transportation Average ETF (IYT) has risen 12.8%. IYT has allocated nearly 20% of its funds in passenger airline stocks.

Southwest’s top peers, Delta (DAL) and United Airlines stocks have lower returns of 15.4% and 5.6% YTD, respectively. American Airlines is the worst performer among the top four US carriers. So far, the stock has lost 16% or $2.3 billion of its market capitalization.

Analysts’ recommendations

The analysts polled by Reuters are still bullish about Southwest Airlines. They see double-digit upside potential in the company’s share price. The stock has received bullish recommendations from 50% of the 20 analysts. Meanwhile, 40% of the analysts recommend holding it and the remaining 10% are bearish. Analysts’ average target price of $60.65 reflects a return of 11% over the next year.

Last month, the stock received rating upgrades from two prominent Wall Street analysts. On September 13, Macquarie analyst Susan Donofrio upgraded the stock to “outperform” from “neutral.” Bank of America (BAC) analyst Andrew Didora thinks that Southwest Airlines has a better cost structure than its peers. He thinks that the company can enhance its margins despite the expected higher capacity and slower demand for next year. He raised the rating on the stock to “buy” from “neutral” on September 23.

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