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Southwest won’t fly 737 MAX until 2020 as grounding hits airline earnings

July 26, 2019

Southwest Airlines on Thursday became the first US carrier to give up on seeing the Boeing 737 MAX return to the skies this year, as the worldwide grounding of the top-selling aircraft has dented results for two major airlines.

Domestic-oriented Southwest said it has begun talks with Boeing about compensation for the impact from widespread flight cancelations and delayed deliveries of new planes, that forced it to push back its plan to expand service to Hawaii.

American also has taken a hit amounting to $400 million from the MAX crisis, but despite that both airlines reported higher second-quarter profits on strong consumer demand.

The Boeing MAX planes have been grounded since mid-March following two crashes that claimed 346 lives. Boeing has said it expects to win regulatory approval around October to resume flights, but has emphasised that the timeframe could be extended.

On Wednesday, Boeing said it could temporarily halt production of the MAX if the grounding drags out much longer.

American reported an 18.9 percent jump in second-quarter profits to $662 million, as total revenues rose 2.7 percent to $12 billion.

Results also were dented by flight cancellations due to an ongoing dispute with maintenance workers and bad weather.

American now estimates the total impact of the MAX grounding to be $400 million for 2019, up $50 million from the prior estimate.

Executives said they are in close contact with the Federal Aviation Administration and Boeing, and unlike Southwest still believe the plane will be ready to fly by November 2.

"We remain confident in the aircraft and look forward to reintegrating the aircraft into our fleet once it is cleared by regulators," American chief financial officer Derek Kerr said.

American’s chief executive, Doug Parker, said he had "high-level" conversations with senior Boeing executives about compensation, but did not discuss details of any payments.

American now anticipates capacity growth of only 1.5 percent this year, which was cut from 3.0 percent because of MAX cancelations, executives said.

Southwest reported a 1.1 percent rise in profit to $741 million, as revenues climbed 2.9 percent to $5.9 billion.

Southwest now plans to resume flights on the MAX on January 5, more than two months later than previously expected. The airline said it could take up to two months to resume flights once the plane is cleared by regulators because of FAA directives, including pilot training.

With its fleet of 34 MAX planes, the company said it took a $175-million hit to the bottom line in the second quarter due to the MAX crisis, and has had "preliminary discussions" with Boeing on compensation for damages.

Southwest chief executive Gary Kelly told CNBC the impact would be bigger in the third quarter, because the company was due to receive 41 more MAX planes this year "so our exposure with our route system grows again."

Boeing has set aside $4.9 billion to compensate airlines for flight cancellations and plane delivery delays.

"We’re unhappy that it’s taken so long, and we’re in the dark, just like you are, on a number of technical matters," Kelly said, adding that pilots are working with Boeing "to understand the changes in terms of the software and the impact on flight control systems."

"We just need this all to get done and get the airplane back in the air."

Pulling the MAX from Southwest’s fleet delayed plans to expand service to Hawaii, which was one reason the airline to slashed its target for seat capacity. It now expects to see that key benchmark fall by one to two percent this year, rather than growing by five percent as previously expected.

The airline also will cease operations at Newark’s international airport to save money and shift all New York travel to New York LaGuardia Airport.

Despite reporting higher profits, both airlines saw their share prices fall. American dropped 3.3 percent to $33.45 around 1415 GMT, while Southwest lost 1.5 percent to $53.91.