Max Afflictions Worsen as Symptoms Mount at American, Southwest

(Bloomberg) -- 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 jet from its schedule into next year.

American Airlines Group Inc. 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 Co. said caution dictated removing the Max from its schedule through Jan. 5, becoming the first U.S. 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 Co. 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 plane. The narrow-body jet -- a fuel-efficient workhorse -- was grounded globally in March after two crashes killed 346 people.

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

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

“‘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.”

Analyst Skepticism

But that prediction was met with skepticism, 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 5, 2020,” Helane Becker, a Cowen & Co. analyst, said in a note to clients. “There is potential risk to the outlook if the Max is pulled past Nov. 2” at American.

The Fort Worth, Texas-based carrier had record sales in the second quarter. But Jamie Baker, an analyst at JPMorgan Chase & Co., 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.

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 planes. American said revenue for each seat flown a mile, a gauge of pricing power known as unit revenue, would increase 1% to 3% in the current quarter.

Domestic Demand

“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 plane from schedules through Nov. 2.

“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.”

Delivery Timeline

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

Southwest’s operating income was reduced by $175 million last quarter as it parked its 34 Max jets 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% to 2%, compared with original plans to expand 5%.

Unit revenue increased 6.8% last quarter and will rise as much as 5% 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.”

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, Thomas Black

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