Southwest Airlines lost almost a billion dollars due to 737 MAX

posted on 24th January 2020 by William Hayes
Southwest Airlines lost almost a billion dollars due to 737 MAX

The Boeing 737 Max grounding cost Southwest Airlines almost one billion dollars in operating income, announced the world’s largest low-cost carrier.

The carrier has joined numerous other airlines in trying to find capacity and try to minimise the damage caused by the aircraft’s continuing problems.

“I am confident about the Max, and our pilots are confident about the Max,” chief executive Gary Kelly tells analysts on the company’s earnings call on 23 January. “The timing remains uncertain, and we are working through all that right now.”

Kelly says that 2019 full-year operating profit was $828 million – or 28% – lower than had the Max been flying in the airline’s all-737 fleet. “The grounding of 75 of our airplanes, or about ten percent of our fleet, presents a crisis-like challenge for our team.”

The Dallas-based carrier’s net profit in the full year 2019 fell to $2.3 billion from $2.4 billion in 2018. In the final quarter of 2019, net profit hit $514 million, down 21% from $654 million in the same quarter a year ago. Full-year revenues rose to $22.4 billion from $21.9 billion, up 2.1%. In the fourth quarter alone, Southwest had revenue of $5.7 billion, flat from the year-ago quarter.

The airline has taken the aircraft out of its schedule until 6 June, but will likely have to extend that as more information becomes available, executives say. In order to reduce some of the fleet deficit created by the lack of the newer generation, lower-fuel burn 737 Max aircraft, the airline is planning on postponing 7 of 18 retirements of older 737-700 aircraft this year. These will fly 2 more years, chief financial officer Tammy Romo says.

“We are also monitoring the used 737 aircraft market because seat growth is not keeping up with demand and we are losing share,” Kelly says. “We plan to aggressively recapture that once the Max is ungrounded.”

Currently, Southwest is not looking to lease additional aircraft, he adds. “Everything is predicated on our assumption that this is a short-lived issue, and not something that we will have to deal with for years.”

Southwest currently has 34 Max aircraft in its fleet, all of which are in storage in Victorville, California. It had had expected to have about 75 Max in the fleet at the end of 2019, and another 38 deliveries of the aircraft in 2020. At the moment, all of these plans are on hold.

The airline has settled with Boeing for an undisclosed amount for the 2019 losses, but hopes to come to another agreement for 2020. Kelly says he is “pleased” with the confidential compensation agreement Southwest and Boeing have signed for last year’s losses, and the airline is continuing discussions with the plane-maker.

“There were years when we had a dozen problems to solve. Right now we have one problem, and it’s a serious one,” Kelly says. “Dogpaddling for a year has cost us customers. It’s not anything we can mitigate until we get airplanes and can grow again. Do I think we’ve been harmed? Absolutely. Everyone knows we will seek further compensation from Boeing,” he adds.

Chief operations officer Mike Van de Ven says that the airline’s 34 stored Max will have to go through some maintenance work before they are once again ready to go into revenue service. 27 further aircraft have been built and are being stored at Boeing facilities.