Southwest CEO Vexed at Boeing Max Delays But Would Buy More

(Bloomberg) -- Southwest Airlines Co. is frustrated with the financial beating it’s taking from the grounding of Boeing Co.’s 737 Max. But the carrier is ready to grab more of the single-aisle planes that eventually will make up the majority of its fleet.

Parking its 34 Max jets since mid-March and missing out on new deliveries has shaved $225 million from operating income this year, Southwest said. That prompted the airline to pull out of Newark, New Jersey, and to delay the retirements of seven older, fuel-guzzling 737-700s. The Max void caused the “vast majority” of 20,000 flight cancellations last quarter, the company said.

Still, Chief Executive Officer Gary Kelly says he would look closely at any chance to add more of the upgraded 737s, while declining to say whether Southwest is in talks with Boeing. Ryanair Holdings Plc, Europe’s largest 737 operator, and Australia’s Qantas Airways Ltd. are among airlines that have signaled they might be willing to add Max planes opportunistically as Boeing works to end a sales drought after regulators grounded the jet.

“We’ve made no secret that we have fleet modernization as one of our key strategic initiatives,” Kelly said in an interview Thursday. “That means more Max, less -700s. If there’s an opportunity to pick up more Maxes, we’d certainly look at that very, very carefully.”

Vote of Confidence

Boeing landed a much-needed commitment from British Airways owner IAG SA for 200 of the planes last month. Any purchases by Southwest, which has an all-737 fleet, would be another big vote of confidence in the beleaguered Max, which crashed in October and again in March. The accidents killed 346 people.

The planemaker faces a jumbled delivery schedule once the Max is cleared to fly in the U.S. -- and that may provide an opportunity for buyers. While Boeing is producing fewer of the planes than planned, some airlines or lessors may want to postpone delivery dates due to market conditions, pilot training requirements or uneasy passengers.

Southwest on Thursday became the first U.S. carrier to give up on resuming flights this year, pulling the Max from its flight schedules through Jan. 5 as it and other airlines await regulatory approval to restart operations.

That means Southwest’s capacity will decline as much as 2% this year instead of growing nearly 5% as originally planned.

CEO’s Frustration

On a conference call to discuss second-quarter financial results, Kelly was clear about his frustration. The ongoing delays have been “very painful” for both Southwest and Boeing, its longtime aircraft supplier, he said.

“As we look at route performance, market after market, it’s obvious we are short capacity, that we’re spilling traffic and leaving money on the table and helping our competitors,” he said on the call. “That is not anything we will leave unattended.”

Frustrated by that unusual loss in market share, Southwest management “will likely be aggressive as they fight to get those customers back on their aircraft,” Cowen & Co. analyst Helane Becker said in a note to investors.

Southwest expected to receive 41 more Max planes this year, but now thinks it will get only 16, with the rest slipping until 2020. About six of those, it said, are likely to shift into 2021.

“It’s really all about the Max. That’s the only issue that we are dealing with,” Kelly said. “Everything else with the company is rock solid.”

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net;Julie Johnsson in Chicago at jjohnsson@bloomberg.net

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

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