Southwest Took At $800 Million Hit In 2019 From The MAX Crisis

During an earnings call on January 23rd, Southwest Chief Executive Gary Kelly told analysts that he is confident about the Boeing 737 MAX. He added that his airline’s pilots are also confident in the aircraft as well. In that same call, however, Kelly noted that 2019’s full-year operating profit was down 28%, or US$828 million less than if the grounded aircraft had been operational.

Southwest’s Boeing 737 MAX Aircraft are currently parked in Victorville, California. Photo: Getty Images

The impact of the MAX groundings

With its fleet of 737 MAX aircraft stuck on the ground, Southwest, as well as its American rivals United and American Airlines, have been dealing with reduced capacity, delayed growth and delayed retirement of older aircraft.

“The timing remains uncertain, and we are working through all that right now…The grounding of 75 of our airplanes, or about ten percent of our fleet, presents a crisis-like challenge for our team.” -Gary Kelly, CEO of Southwest

Southwest’s net profit fell from $2.4 billion in 2018 to $2.3 billion in 2019. The airline reports that Q4 of 2019 had a net profit of $514 million, which is a 21% fall from $654 million for Q4 2018. However, full-year revenues were up 2.1%: $22.4 billion from $21.9 billion.

The increase in revenue was attributed to an increase in passenger revenue and solid passenger demand. Kelly thanked his employees for doing a “truly superb” job in 2019 despite the MAX groundings.

Deferring 737-700 retirement

Early on in the call, Kelly stated his company’s goals for 2020. Up first on the list was returning the MAX to service, which is very much tied to the one main problem he later identified: fleet growth. Under the assumption that the MAX return to service is only months away, and not years, Kelly talks about holding off on the airline’s plans for retiring its older aircraft:

“We are aggressively pursuing a couple of tactical ideas. Number one is mainly our Boeing 737-700 retirement schedule where we have a lot of flexibility. So, we’re actively deferring retirements where it makes sense.”

Southwest has received the most Boeing 737 MAX of any airline in the world. Photo: Southwest Airlines

Seeking further compensation

The airline currently has 34 Max aircraft in storage in Victorville, California. Chief Operating Officer Mike Van de Ven notes that these aircraft have to undergo “maintenance and make-ready work” before they return to service. There are another 27 MAX jets already built but are still at Boeing’s facilities. These aircraft will still need to go through the “delivery and acceptance process” as well as any additional make-ready work.

In addition to maintenance and make-ready work, the MAX re-integration process will also require manual updates and pilot training. In fact, Boeing has now recommended to the Federal Aviation Administration (FAA) that 737 MAX pilots must undergo simulator training. This is a recommendation that the FAA will likely agree with.

Southwest currently has three MAX simulators and is awaiting three more by summer’s end, and yet another three by the end of the year. Van de Ven says that if all pilots undergo a two-hour training session in the simulator, it will take “at least a couple of additional months” to get all of their pilots through the training.

It’s because of the above reasons, as well as lost revenue, that Southwest (and other airlines) will receive compensation from Boeing. The airline has settled for an undisclosed amount for 2019 losses. However, further compensation will be requested from Boeing.

“Do I think we’ve been harmed? Absolutely. Everyone knows we will seek further compensation from Boeing,” -Gary Kelly

Parked Southwest 737 MAX aircraft. Photo: Getty Images

Conclusion

Based on this fourth-quarter earnings call, it sounds like Southwest is doing quite well considering how many of its new aircraft are not flying. The biggest impact appears to be a lack of growth – which the airline says it plans to pursue aggressively once the MAX is back in service.

Do you think Southwest’s undisclosed compensation deal with Boeing was more or less than the $828 million in lost income? Let us know in the comments what it might be and/or what it should be.

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