Southwest reports income fall due to various factors including 737 Max groundings

posted on 26th April 2019 by Justin Burns

Southwest Airlines has reported in the first quarter (Q1) of 2019 net income of $387 million – a decline on the $463 million in Q1 2018 – which it said was due to the impact of the grounding of its 737 Max 8 aircraft and other factors.

The US carrier also recorded record operating revenues of $5.1 billion in Q1, up 4.4 per cent on the same quarter in 2018.

Q1 operating revenue per ASM (RASM, or unit revenues) increased 2.7 per cent, driven largely by a passenger revenue yield increase of 2.6 per cent, offset slightly by a load factor decline of one-half point, year-over-year, to 81 per cent.

The airline said it experienced several unexpected events during Q1 2019 that contributed to a negative revenue impact of more than $200 million.

These included the groundings of 34 737 Max 8, unscheduled maintenance disruptions in connection with efforts to reach a TA with AMFA, severe winter weather, the US government shutdown, and softer leisure revenue trends.

The negative impact of these events to Q1 2019 year-over-year RASM was approximately two points.

Chairman of the board and chief executive officer, Gary C. Kelly said: “Our first quarter 2019 net income was solid despite unexpected headwinds significantly impacting our performance.”

Southwest said in Q1 in had to make more than 10,000 flight cancellations due to the ground of Boeing 737 Max 8 aircraft, unscheduled maintenance disruptions in connection with efforts to reach a Tentative Agreement (TA) with the Aircraft Mechanics Fraternal Association (AMFA), and severe winter weather.

Kelly added: “We estimate the impact of these flight cancellations, combined with the impact of the U.S. government shutdown and softness in leisure revenue trends, reduced our first quarter 2019 net income by approximately $150 million.

“While our strong momentum coming into the year slowed, we drove record revenues, strong margins and cash flows, a healthy profitsharing accrual for our employees, and significant returns for our Shareholders. All notable first quarter achievements, and testaments to our resilient brand and low-cost business model.

He said the timeline is uncertain for the MAX aircraft return to service. “In the meantime, we have proactively adjusted our published flight schedules for the next several months and removed all MAX flights through 5 August. Our goal is to stabilise and protect the integrity of our flight schedule, while providing dependability and reliability for Customers booking their summer travel.

“The MAX aircraft represents less than 5 per cent of all daily flights, and the vast majority of our Customers’ itineraries have been unaffected by the MAX groundings.

“Following a rescission of the Federal Aviation Administration (FAA) order to ground the MAX, we will return the aircraft to service once we are confident that we are in compliance with all necessary FAA directives and all necessary Pilot training has been completed. Safety is our top priority, and that commitment will never be compromised.

“The flight cancellations in first quarter 2019, and the resulting lower available seat mile (ASM, or capacity) growth, year-over-year, created significant pressure on our first quarter unit costs. Flight cancellations are expected to drive unit cost pressure for the duration of the MAX groundings.

“While we are adjusting our 2019 plans for the MAX groundings, our long-term financial goals remain unchanged: maintain a strong balance sheet, investment-grade credit ratings, and ample liquidity; generate robust operating and free cash flows; grow earnings, margins, and capital returns; and maintain healthy Shareholder returns.”

The airline ended Q1 2019 with 753 aircraft in its fleet. It expects to end 2019 with approximately 775 aircraft in its fleet based on the current aircraft delivery schedule and net of expected 737-700 retirements, prolonged grounding of the MAX aircraft could impact the airline’s delivery and retirement schedule.