Fall Travel Flop Undercuts Boeing 737 Max Return
(Bloomberg Opinion) -- Boeing Co.’s 737 Max may be on track to finally return to commercial service later this year, but the plane’s biggest customer isn’t eager for fresh deliveries.
Southwest Airlines Co. doesn’t expect to take any new Max jets this year, Chief Executive Officer Gary Kelly said in an interview with Bloomberg News. The airline had previously said it would add no more than 48 of the planes to its fleet through the end of 2021, and it reiterated that plan in a filing on Thursday. But the back-end weighting of these deliveries puts significant pressure on a post-pandemic travel recovery that has been volatile and remains highly uncertain in the absence of a widely available vaccine.
While bookings for leisure travel improved in May and June, the nascent recovery in demand has stalled in July amid a resurgence of coronavirus outbreaks across America, Southwest said Thursday as it reported a second-quarter net loss of $915 million. As a result, the company now feels like it’s offering too many flights in August and September relative to demand. “We will adjust our flight schedule aggressively and frequently in response to this volatile demand environment,” Kelly said in a statement. And that will likely mean flying few Max jets for the time being.
The downbeat outlook provides a dose of reality for Boeing’s rally on signs of progress for the grounded Max jet. The Federal Aviation Administration said this week it’s preparing to issue formal legal directives for repairs of the plane, which indicates the agency is finally comfortable with proposed fixes some 16 months after the second of two fatal crashes prompted regulators around the world to ban the plane from commercial flight. The public gets 45 days to comment on the FAA’s action and there remain final additional steps in the un-grounding process, which likely pushes the plane’s return back to October. That will put a crimp in Boeing's plans to resume deliveries during the third quarter, but such a delay hardly matters much in a time when airlines are making fresh cuts to their capacity. New planes aside, Southwest now doesn’t even expect to bring any of the 34 Max jets it already owns back into its active fleet until at least December, given the time needed to retrain pilots.
On the positive side for Boeing, American Airlines Group Inc. Chief Financial Officer Derek Kerr said Thursday that the airline was planning to take delivery this year of 17 Max jets that are either already built or in the process of being built, pending regulatory approval. The carrier had reportedly warned Boeing it would cancel orders for about a dozen Max jets if negotiations over financing failed to come to fruition. In a filing on Thursday, American said it now had financing commitments in place for all scheduled 2020 deliveries with the exception of three Boeing Max jets and Kerr said ongoing discussions had been “good.”
But American, like other airlines, can't take deliveries of the Max until regulators clear it to fly again. The carrier had pulled the Max from its schedule through Sept. 9 but it will likely have to make additional adjustments given the current expected timeline of regulatory approval. Delivery of the 17 Max jets may slip into the early part of next year, Kerr acknowledged, pushing out a potential source of cash for Boeing.
American is also dialing back its capacity plans after a summer push that was more aggressive than peers. Some 40% of the airline’s post-Labor Day traffic is tied to business travel, and it’s only seeing a “token” amount of demand on that front currently, Vasu Raja, American’s chief revenue officer, said on a call to discuss second-quarter results. Net bookings are currently trending down 75% to 80%, a marked difference from May and June which were buoyed by economic re-openings across the Sun Belt, Raja said. So American now expects third quarter capacity to be 60% lower than a year earlier, consistent with its flight schedule for July.
No matter when the Max returns to the skies, Boeing can't start to rebuild its cash flow without a meaningful recovery from the airlines. And that appears to have been put on ice for now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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