Southwest Air Says 737 Max Grounding and Hawaii Flights Will Increase Costs

(Bloomberg) -- Southwest Airlines Co. said the grounding of its Boeing Co. 737 Max fleet and the start of flights to Hawaii will increase cost pressures during the busy summer travel season.

  • Costs for each seat flown a mile will climb as much as 12.5 percent this quarter, the carrier said in an earnings release Thursday. The efficiency gauge, which excludes fuel and profit sharing, will jump as much as 6.5 percent this year, compared with Southwest’s earlier forecast of as much as 3.5 percent.

Key Insights

  • Higher costs are apt to cause heartburn for investors. In the first quarter, the U.S. government shutdown delayed certification of Southwest’s ability to fly over the ocean and start Hawaii service, adding to the pressure on expenses from the Max grounding.
  • Southwest is getting a boost from strong leisure and corporate travel, while demand for lucrative tickets sold just before flights is strong. Revenue from each seat flown a mile, a key pricing measure, is expected to rise 5.5 percent to 7.5 percent this quarter, outpacing forecasts by Delta Air Lines Inc. and United Continental Holdings Inc.
  • Southwest has a lot riding on Boeing’s software update for the 737 Max, which has been grounded for six weeks after two deadly crashes in five months. The airline is the biggest U.S. operator of the model, and is canceling 130 flights daily because of the grounding. Southwest has pulled the Max from its schedules through Aug. 5.
Southwest Air Says 737 Max Grounding and Hawaii Flights Will Increase Costs

Market Reaction

  • The stock gained 14 percent this year through Wednesday, while a Standard & Poor’s index of the five largest U.S. airlines rose 11 percent. Southwest didn’t immediately trade ahead of the open in New York.

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