American Airlines profit to take $400m hit on Boeing fallout

Shares fell the most in seven months and was third-biggest decline on the S&P 500 index

Dozens of grounded Boeing 737 MAX aircraft parked at Boeing Field in Seattle, Washington.

Dozens of grounded Boeing 737 MAX aircraft parked at Boeing Field in Seattle, Washington.

 

Fallout from the global ban on Boeing’s 737 Max deepened as American Airlines warned that profit this year would take a $400 million hit, while Southwest Airlines scratched the aircraft from its schedule into next year.

American Airlines Group said Thursday that the drag on its annual pretax profit would include a $175 million hit for the second quarter and an expected $125 million penalty in the third. The shares fell the most in seven months.

Meanwhile, Southwest Airlines said caution dictated removing the Max from its schedule through January 5th, becoming the first US carrier to drop the grounded aircraft for the rest of this year.

The airline also will stop flights at Newark Liberty International Airport outside New York City.

The announcements, made as the carriers reported earnings, came a week after Boeing said it would take a $5.6 billion pretax charge to compensate Max customers.

The manufacturer on Wednesday said it might need to halt output of the aircraft. The narrow-body aircraft – a fuel-efficient workhorse – was grounded globally in March after two crashes killed 346 people.

Price falls

American fell 8.4 per cent to $31.67 at the close in New York, the most since December 7th and the third-biggest decline on the S&P 500 index. Southwest climbed less than 1 per cent to $54.91. Boeing dropped 3.7 per cent to $348.09.

For now, American has kept its two dozen Max aircraft from its schedule through November 2nd.

“’We really don’t have any new information that leads us to make changes,” president Robert Isom said on a conference call with analysts. “Based on what we know today, we should be able to hit the timeline.”

But that prediction was met with scepticism, as was a modest increase in American’s 2019 profit forecast. The carrier said adjusted earnings would be at least $4.50 a share and as much as $6 this year. The previous forecast called for no less than $4 at the bottom end.

“Management appears to have confidence in the outlook given lower fuel and solid demand, but investors may question the outlook given Southwest announced it is pulling the Max from its schedules through January 5th, 2020,” Helane Becker, a Cowen and Co analyst, said in a note to clients. “There is potential risk to the outlook if the Max is pulled past November 2nd” at American.

The Fort Worth, Texas-based carrier had record sales in the second quarter. But Jamie Baker, an analyst at JPMorgan Chase, questioned American’s continued assurance that it will achieve $1 billion in incremental revenue this year.

“We don’t really see it,” Baker said in a report.

Fare increases

There’s a slim silver lining from the grounding. With fewer seats for sale and high demand for travel, airlines have been able to raise fares and still fill aircraft. American said revenue for each seat flown a mile, a gauge of pricing power known as unit revenue, would increase 1 per cent to 3 per cent in the current quarter.

“We’ve looked ahead in future months and are not seeing really anything that would make us concerned at this point around continued strength in domestic demand,” said Don Casey, American’s senior vice-president of revenue management.

Boeing has said it expects that regulators will return the Max to service in the fourth quarter. Southwest accepted that estimate but said it could take two months to get aircraft out of mothballs and comply with any changes ordered by authorities, such as pilot training. The Dallas-based airline previously had pulled the aircraft from schedules through November 2nd.

“We want our airplanes. We want to get them as fast as is practical,” chief executive officer Gary Kelly said.

“I would be concerned if there is any additional delay, period. I don’t care what the source of it is,” he said in an interview.

As for the possibility Boeing will halt Max production, “I don’t care what they do in the background to manage their business, I just don’t want any further delays.”

Chief financial officer Tammy Romo said 25 of the 41 remaining Max deliveries scheduled for this year are expected to slip into 2020.

Operating income

Southwest’s operating income was reduced by $175 million last quarter as it parked its 34 Max aircraft and didn’t receive aircraft on order. The grounding will continue to raise Southwest’s costs as the airline cuts flight and seating capacity this year.

With the Max grounding crimping growth, Southwest made a “tactical decision” to move aircraft from poor-performing Newark to expand in Hawaii and international markets with higher demand, Kelly said. Southwest will moves its 20 daily departures from Newark to New York’s LaGuardia Airport.

The extended grounding means Southwest’s flight and seat capacity will shrink this year by 1 per cent to 2 per cent, compared with original plans to expand 5 per cent.

Unit revenue increased 6.8 per cent last quarter and will rise as much as 5 per cent in the current quarter from a year earlier, Southwest said.

“The removal of Max flying through early January 2020 is prudent (others will inevitably follow),” JPMorgan’s Baker said. “The risk remains that the Max doesn’t fully return to revenue service until later in the first quarter of 2020.” – Bloomberg