Southwest Air Warns That Grounded Max Is Stalling Growth, Raising Costs

(Bloomberg) -- Southwest Airlines Co. warned that a closely watched gauge of costs would climb again this quarter as the extended grounding of the Boeing Co. 737 Max stymies growth at least through the first half of 2020.

• The cost to fly each seat a mile will increase 6% to 8% this quarter, including seven percentage points from reduced flight and seat capacity because of the Max absence, the airline said in a statement Thursday as it reported financial results. Southwest didn’t provide a full-year outlook because of the uncertainty of when the Max will return to service.

Key Insights

• Without the Max, Southwest’s ability to grow has been constrained, limiting the potential to spread operating costs across more passengers. Seating capacity will fall as much as 2.5% this quarter, the airline said.
• While Southwest, American Airlines Group Inc. and United Airlines Holdings Inc. have racked up expenses from the Max grounding, the plane’s absence has also supported fares by keeping a lid on seats and flights. Southwest’s yield, or average fare per mile, rose 1.5% in the final quarter of 2019.
• Southwest -- the biggest operator of the Max, with 34 in its fleet when the plane was grounded last March -- reached a confidential settlement with Boeing after incurring $828 million in 2019 damages. That excludes 2020 impacts.

Market Reaction

• Southwest fell 1.3% to $52.80 before the start of regular trading in New York. The stock slipped less than 1% this year through Wednesday, the second-best performance in a Standard & Poor’s index of the five largest U.S. airlines.

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• Fourth-quarter adjusted earnings fell to $1.16 cents a share, excluding the impact of a profit-sharing award from the Boeing settlement. That surpassed the $1.09 average of analyst estimates compiled by Bloomberg. Revenue increased 0.4% to $5.73 billion, while analysts expected $5.72 billion.
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• Company statement

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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