Airlines hedge bets over financial impact of 737 Max grounding
|Toronto Star 19 Mar 2019 at 10:24|
NEW YORKâ€”At least two airlines have pulled their forecasts as they assess the financial impact of last weekâ€™s grounding of the Boeing 737 Max jetliner after the second deadly crash of the plane 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 withdrawing its forecasts Monday, echoing a similar move from Air Canada last week.
â€śU.S. airlines expect the Max grounding to be short-lived as schedule adjustments, when made, are short in duration,â€ť 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 (U.S.) a plane each month, said George Ferguson, an analyst at Bloomberg Intelligence.
For Southwest Airlines, 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 doesnâ€™t have enough used or parked planes to replace more than 350 grounded Max jets, and airlines are likely to press Boeing for compensation.
Hereâ€™s a look at how the airlines may be affected:
With more than 30 Max aircraft, representing about 7 per cent of its capacity, the airline has â€śthe greatest U.S. exposure,â€ť 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 per cent, up from the companyâ€™s January forecast for about 6 per cent.
Southwest is â€śhaving a tough quarter operationally,â€ť Kevin Crissey, an analyst at Citigroup Inc., said in a March 14 note.
Because of the Max grounding, the airline â€śis facing a larger aircraft shortage, with essentially no notice.â€ť
Southwest was already struggling with a spate of groundings for maintenance amid tense labour talks with its mechanics.
While any hits to American Airlines will be less than those for peer Southwest, Lalwani still anticipates an â€śadverse impact to capacityâ€ť with its 25 Max planes grounded, hurting first-quarter capacity by 50 basis points and second-quarter by 100 basis points.
The companyâ€™s annual cost per seat mile is now expected to rise around 2.5 per cent, exceeding the carrierâ€™s own forecast, which the analyst sees crimping earnings.
Air Canada has 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 â€” about 10 per cent of its fleet â€” likely has â€śsome toolsâ€ť to help make up the capacity, Cormark analyst David Ocampo wrote in a note Monday.
â€śNevertheless, we believe there will be some negative impact in Q1 and Q2 from the cost associated with rebooking delays and the lost capacity,â€ť Ocampo added.
WestJet said Monday itâ€™s suspending all 2019 financial guidance as the company continues to carry out and execute its contingency plan.
Max models made up 7 per cent of the airlineâ€™s fleet, totalling 13 planes, Cormarkâ€™s Ocampo notes.
â€śWestJet expects it will be able to protect approximately 86 per cent of guests booked on Max and cover approximately 75 per cent of the flights that were intended to operate on the Max with other aircraft,â€ť the carrier said.
United Continental said it wasnâ€™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 Stanleyâ€™s Lalwani expects minimal impact relative to other airlines, as United Continentalâ€™s Max capacity is about 1 per cent.
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, BIâ€™s Ferguson said.
The airline has â€śrobust expansion plansâ€ť that may have to be reduced if the Max ban lasts more than a few months, he said.
The grounding affects about 1 per cent of Norwegian Airâ€™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 shouldnâ€™t see a material impact to profits or growth plans because the Max accounts for 2.7 per cent of combined air fleets in the country, said Rahul Kapoor, a Bloomberg Intelligence analyst.
â€śChina Southern and Air China operated 24 and 16 of the models, respectively, too few for a huge blow to their operations and traffic growth,â€ť he said in a March 14 report.
The impact to Chinese carriersâ€™ 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 Vietnamâ€™s VietJet, are at risk of being delayed on Boeingâ€™s suspension of Max deliveries, Kapoor said.
SpiceJet, VietJet and Indonesiaâ€™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.