6 Nov

Boeing MAX Grounding Costs US Airlines $1 Billion

WRITTEN BY Anirudha Bhagat

Combined, Southwest Airlines (LUV) and American Airlines (AAL) estimate that the Boeing (BA) 737 MAX aircraft grounding will cost them approximately $1 billion this year. They assume that the costs will increase in 2020. The uncertainty about the planes’ return to service still looms. Notably, the aircraft has faced a global flying ban since mid-March following two fatal accidents within five months.

Approximately 390 Boeing MAX planes were in operation at the time of the worldwide grounding. As a result of the grounding, global air carriers are facing thousands of flight cancelations and capacity losses every month.

US airlines’ Boeing MAX grounding cost

Southwest Airlines, which owns 34 MAX aircraft, has faced over 40,000 flight cancelations since its grounding in mid-March. Due to the massive cancelations, the company lost a cumulative $385 million in revenues in the second and third quarters. During the third-quarter results, the company said that it expects the grounding to impact its 2019 revenues by $435 million.

Also, the flying ban on Boeing MAX aircraft impacts Southwest Airlines’ expansion plan—mainly across the Hawaiian Islands. The company got the license to fly its planes between the Hawaiian Islands and California in March. Earlier, Southwest Airlines planned to only fly Boeing MAX aircraft across this network due to the jet’s fuel efficiency.

The company also planned to aggressively increase fleets across the network by using fresh MAX deliveries from Boeing this year. Southwest Airlines was supposed to receive an additional 41 aircraft this year.

American Airlines is another US carrier that’s feeling the pinch of the Boeing crisis. The company, which has 24 Boeing MAX aircraft, has suffered more than 20,000 flight cancelations since its grounding in mid-March.

In the second and third quarters, American Airlines saw a cumulative $315 million reduction in its pre-tax income. The company expects another negative impact of $225 million on its fourth-quarter pre-tax income. Overall, the airline expects the Boeing MAX grounding to reduce its 2019 revenues by $540 million.

United Airlines (UAL) also owns 14 Boeing MAX planes. However, the company hasn’t provided its estimated losses. United Airlines has managed to fill the vacant MAX fleets with its older 737 series of planes. However, the company said that using larger and older planes across the MAX flying network could lead to higher operating costs.

US airlines negated MAX impact

Despite the massive negative impact from the Boeing MAX grounding, the three US airlines reported strong third-quarter results. The airlines’ top-line and bottom-line results were better than analysts’ expectations and marked a significant YoY (year-over-year) improvement.

American Airlines’ third-quarter earnings rose 20% YoY due to 3% higher revenues, efficient cost management, and lower fuel costs. Southwest Airlines’ third-quarter revenues and profits grew 1.1% and 13.9%, respectively. United Airlines reported a 2.4% YoY increase in sales, while its earnings rose 33% YoY.

Boeing’s provisions for MAX customers’ losses

Air carriers around the world are negotiating compensations with Boeing for their losses due to the 737 MAX grounding. During the second-quarter results, Boeing made a provision of $5.6 billion as an estimated compensation cost to MAX customers.

However, we think that Boeing’s compensation costs will increase significantly. The company made compensation provisions based on the assumption of MAX’s return to service in the fourth quarter. However, the possibility doesn’t look realistic. World regulators are still reviewing the updated flight-control system.

The European Union Aviation Safety Agency’s chief, Patrick Ky, expects Boeing MAX aircraft to fly again by the end of the first quarter of 2020. Southwest Airlines and Air Canada have already pushed back MAX flight cancelations until mid-February. American Airlines and United Airlines have extended the Boeing MAX grounding through mid-January.

Boeing’s overall cost associated with the MAX crisis has reached $9.2 billion. Apart from the $5.6 billion in compensation costs, the company has witnessed rising production expenses due to lower output. Following the Ethiopian Airlines crash on March 10, Boeing reduced MAX’s monthly production 19% to 42 units. As a result, the company has booked $3.6 billion in additional production costs.

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