Southwest Airlines Co., the largest operator of Boeing Co.’s 737 Max, said the jet’s grounding will combine with soft leisure-travel demand to shave $150 million from first-quarter revenue.
The figure compounds the $60 million hit to revenue from the U.S government shutdown earlier in the period, Southwest said. The Max groundings, bad weather and reduced service during contract negotiations together will force the cancellation of 9,400 flights from mid-February to the end of the quarter, the Dallas-based said in a statement Wednesday.
“The impact of recent disruptions is likely somewhat greater than investors expected, primarily on the cost side, but is likely to be viewed as ‘one-time,”’ Savanthi Syth, an analyst at Raymond James Financial, said in a report. She estimated that Southwest’s first quarter profit would be 63 cents a share, while the average of Wall Street estimates compiled by Bloomberg was 80 cents.
Southwest climbed 1.5 percent to $49.46 at 9:32 a.m. in New York. The shares had climbed 4.9 percent this year through Tuesday, while a Standard & Poor’s index of airline stocks fell 2.6 percent.
Worldwide Grounding
The Max has been grounded worldwide since March 13, three days after an Ethiopian Airlines plane crashed, raising concern that the disaster may have been caused by the same errant flight control software implicated in the loss of a Lion Air jet in October. The accidents killed a total of 346 people. Southwest declined to comment on whether it would seek to recoup costs related to the Max grounding from Boeing.
Southwest, which has 34 Max jets in its fleet of 750 aircraft, said it can’t predict the financial impact of the grounding beyond this quarter. The airline has reduced its flight schedule through April 20 and is evaluating future adjustments.
Gains in unit revenue, a measure of pricing power, will be limited to 2 to 3 percent from a year earlier on “further softness in leisure-oriented passenger demand” and average fares, Southwest said. The carrier, which previously forecast an increase of as much as 4 percent, is seeing “continued strength” in tickets purchased just before travel.
Fare Weakness
Industrywide, domestic nonpremium fares fell 2.6% in February after a 0.5% drop in January, as airlines lowered prices to lure customers and contend with the effects of the government shutdown, according to a report last week by Bloomberg Intelligence analyst George Ferguson. Demand for leisure travel remained weak and will continue so through this quarter, he said.
Costs for each seat flown a mile, a measure of efficiency, will rise 10 percent, up from the previously estimated 6 percent. The higher volume of cancellations accounts for about 3 points of that, Southwest said. Some expenses are fixed once schedules are set and aren’t wiped out by cancellations. Labor costs will rise about $30 million from a tentative contract agreement that was recently reached with mechanics.
About 3,800 of the quarter’s cancellations were caused by weather, 2,800 by the Max groundings and 2,800 by “unscheduled maintenance disruptions” during contract talks with the mechanics union, the airline said. That will reduce Southwest’s planned growth this quarter to 1 percent from a year earlier. The airline previously expected as much as 4 percent.
Labor Negotiations
Southwest sued the Aircraft Mechanics Fraternal Association earlier this month, claiming mechanics were engaging in a work slowdown by grounding planes for repairs not related to flight safety, forcing it to cancel flights and declare an “operational emergency” in five cities where it has maintenance bases. The two sides reached an agreement in principle for a new labor contract on March 16.
As of March 13, Southwest had 41 remaining Max deliveries scheduled this year, with 221 firm orders for the plane.
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