At least two airlines have pulled their forecasts as they assess the financial impact of last week’s grounding of the Boeing Co. 737 Max jetliner after the second deadly crash of the plane model in five months.
Analysts are expecting a short-term hit to flying capacity while Boeing resolves safety concerns and trains pilots. Yet the financial impact remains in question, with WestJet Airlines Ltd. withdrawing its forecasts Monday, echoing a similar move from Air Canada last week.
“U.S. airlines expect the Max grounding to be short-lived as schedule adjustments, when made, are short in duration,” Stifel analyst Joseph DeNardi wrote in a March 18 note. His expectation for available seat miles, a measure of capacity, was unchanged from the prior week for the first quarter, and down 30 basis points for the second quarter, he said, suggesting a more limited impact than some had feared.
Securing used aircraft to replace the grounded planes would cost about $250,000 a plane each month, said George Ferguson, an analyst at Bloomberg Intelligence. For Southwest Airlines Co., the biggest buyer of the revamped single-aisle workhorse, that would mean an extra cost of around $8.5 million for its 737 Max fleet of 34 planes. Even so, the world doesn’t have enough used or parked planes to replace more than 350 grounded Max jets, and airlines are likely to press Boeing for compensation.
Here’s a look at how the airlines may be affected:
With over 30 Max aircraft, representing about 7 percent of its capacity, the airline has “the greatest U.S. exposure,” Morgan Stanley analyst Rajeev Lalwani wrote in a note Monday. The resulting impacts are expected to lift first-quarter cost per available seat mile to nearly 9 percent, up from the company’s January forecast for about 6 percent.
Southwest is “having a tough quarter operationally,” Kevin Crissey, an analyst at Citigroup Inc., said in a March 14 note. Because of the Max grounding, the airline “is facing a larger aircraft shortage, with essentially no notice.” Southwest was already struggling with a spate of groundings for maintenance amid tense labor talks with its mechanics.
While any hits to American Airlines will be less than those for peer Southwest, Lalwani still anticipates an “adverse impact to capacity” with its 25 Max planes grounded, hurting first-quarter capacity by 50 basis points and second-quarter by 100 basis points. The company’s annual cost per seat mile is now expected to rise around 2.5 percent, exceeding the carrier’s own forecast, which the analyst sees crimping earnings.
Air Canada on Friday suspended its financial forecast for the first quarter and full year because of the grounding. It left financial guidance for 2019-2021 in place, and BMO analyst Fadi Chamoun said he considered the Max grounding to be a short-term issue.
The airline, which operates 24 737 Max jetliners, about 10 percent of its fleet, likely has “some tools” to help make up the capacity, Cormark analyst David Ocampo wrote in a note Monday. “Nevertheless, we believe there will be some negative impact in Q1 and Q2 from the cost associated with rebooking delays and the lost capacity,” Ocampo added.
WestJet Airlines Ltd. said Monday it’s suspending all 2019 financial guidance as the company continues to carry out and execute its contingency plan. Max models made up 7 percent of the airline’s fleet, totaling 13 planes, Cormark’s Ocampo notes.
“WestJet expects it will be able to protect approximately 86 percent of guests booked on Max and cover approximately 75 percent of the flights that were intended to operate on the Max with other aircraft,” the carrier said in a statement.
United Continental Holdings Inc. said it wasn’t experiencing a significant operational or financial effect from the grounding. But in a regulatory filing Friday, the airline cautioned that the impact was likely to worsen if the Max ban stretched into the busy summer travel season.
Morgan Stanley’s Lalwani expects minimal impact relative to other airlines, as United Continental’s Max capacity is about 1 percent. The analyst sees the grounding hurting first-quarter capacity by about 20 basis points, and second-quarter capacity by about 50 basis points, he said.
The Irish carrier will be among the most-affected by the grounding because it has among the largest number of Max planes in operation and scheduled for delivery this year, BI’s Ferguson said. The airline has “robust expansion plans” that may have to be reduced if the Max ban lasts more than a few months, he said.
The grounding affects about 1 percent of Norwegian Air’s overall seat capacity, according to Chief Executive Officer Bjorn Kjos. The carrier has said it will seek reimbursement from Boeing for the costs of the grounding, which a DNB analyst estimates at between NOK5 million and 15 million a day. Norwegian has 18 Max 8 planes.
Air China, China Southern
Chinese carriers shouldn’t see a material impact to profits or growth plans because the Max accounts for 2.7 percent of combined air fleets in the country, said Rahul Kapoor, a Bloomberg Intelligence analyst.
“China Southern and Air China operated 24 and 16 of the models, respectively, too few for a huge blow to their operations and traffic growth,” he said in a March 14 report.
The impact to Chinese carriers’ growth is also likely to be limited, as they have no major outstanding orders. But that could change in the event of a longer-term flight ban.
China Eastern has said it wants to talk to Boeing about losses caused by the Max grounding.
Other Asian Carriers
Planned capacity growth by Indian low-cost carriers Spicejet and Jet Airways, as well as Vietnam’s VietJet, are at risk of being delayed on Boeing’s suspension of Max deliveries, Kapoor said. SpiceJet, VietJet and Indonesia’s Lion Air are among carriers with the largest order books for the 737 Max.
A Lion Air 737 Max 8 crashed into the Java Sea on Oct. 29, killing 189. Less than five months later, an Ethiopian Airlines plane of the same type slammed into the ground minutes after takeoff from Addis Ababa.
–With assistance from Mary Schlangenstein.
©2019 Bloomberg L.P.