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Boeing has now told airlines and suppliers that it doesn’t expect regulators to sign off on the 737 MAX until the middle of 2020, months later than the manufacturer previously expected. In March 2019, following 2 fatal crashes that killed 346 passengers and crew within a 5-month span, the MAX jet model was grounded worldwide for inspection and repair of the plane’s faulty MCAS software. The recertification process, which was expected to last just a few months, has gone on for the better part of 10 months now. The updated timeline reportedly reflects a new, recently discovered software flaw connected to how the MAX’s flight computers power up and verify they’re receiving valid data, the need to correct vulnerabilities in certain wiring bundles, and the need for new pilot simulator training. Boeing said it’s also accounting for “further developments that may arise in connection with the certification process.”
This is a radical departure from company statements from less than 3 months ago, when the company believed a MAX certification by the FAA could come as soon as the end of last November. Boeing’s overoptimistic, and seemingly baseless predictions for certification dates has been a constant since the very beginning of the MAX grounding when the company originally asserted that they’d have FAA clearance by the end of May 2019. MRP was skeptical then and we continue to be skeptical of any timeline the company lays out.
Southwest, United, and American Airlines, increasingly hard hit by the 737 MAX grounding, have already cancelled all previously scheduled flights aboard the jet into June. United Airlines is the most pessimistic of major US airlines carrying a 737 MAX fleet, not expecting the jet back until the fall, at the earliest.
However, even if one assumes the MAX does receive regulatory approval, has the entire existing fleet maintenanced and inspected, and sees a return to service by mid-year, the next 2 quarters and of the year will still undoubtedly to be messy ones for airlines.
Costs Continue to Dampen Airline Earnings
A year ago, American Airlines’ management predicted that the company’s adjusted earnings per share would rise to between $5.50 and $7.50 in 2019; an aggressive forecast, considering that adjusted EPS totaled just $4.55 in 2018. Unfortunately, the 737 MAX’s troubles dashed all hope of achieving the 2019 earnings target, as adjusted EPS rose to just $4.90 and the total lost operating income from the MAX grounding was approximately $550 million on the year.
In the wake of tens of millions of global cancellations, American Airlines added another 10,000 flights to the pile in the fourth quarter: Expect that to continue on, especially as summer travel season approaches.
Southwest’s earnings fell short of Wall Street’s expectations, coming in at only 98 cents a share in the fourth quarter of 2019 versus analyst expectations of $1.09 in per share earnings. The airline’s net income fell 21% to $514 million on revenue of $5.73 billion, while the grounding reduced operating income by $828 million for all of 2019, the airline said. Costs were driven up by tightened capacity, reimbursement payments to 737 MAX pilots, and fuel; the 737 MAX consumes 15% less gas than other 737 models.
As MRP has previously noted, capacity crunches are only getting worse as new planes that airlines expected to be in service by now are indefinitely grounded. The grounding of the 34 MAX planes already in Southwest’s possession, along with Max planes that Boeing was supposed to deliver to Southwest through 2019, meant that the equivalent of 75 airplanes were grounded. Lacking those aircraft, Southwest’s seat capacity declined 1.6% instead of growing almost 5% as planned, according to a company earnings statement. Capacity will fall about 2% this quarter, well below earlier plans for 8% growth. The flying ban has stymied growth plans at Southwest, which, according to CEO Gary Kelly, has missed out on serving as many as 7 million customers and, if Southwest had the MAX during the fourth quarter, its net earnings would have been about 28% higher.
While Southwest President Tom Nealon told reporters on Thursday that “at this point, there’s no notion of discounting Max flights”, given his belief that the “vast majority” of flyers don’t plan to change how they fly, most surveys have indicated that flyers would indeed be hesitant to board a 737 MAX. One of the most recent, conducted last month by Bank of America Merrill Lynch, found that nearly two-thirds of surveyed flyers said they would wait at least six months before flying or never fly it, while most respondents said they would switch to another aircraft if they had the opportunity.
The longer the grounding goes on, the more uncertainty is thrown into just how much work will need to be done on the MAX jets to get them back in the air, as well as how the asset value of the jets will have to be adjusted on airline balance sheets.
Wuhan Coronavirus Threatens International Demand
The newest threat to airlines, though, comes in the form of the 2019-nCoV (colloquially known as Coronavirus) breakout in Central China. Officials with China’s National Health Commission said there were 2,744 confirmed domestic cases, as of Monday, and 461 are considered severe. Officials are also investigating 5,794 suspected cases and tracking over 32,000 who had close contact with the infected patients. The death toll thus far stands at 80 (all in China), but that number is expected to grow in coming weeks. The equivalent of 50 million are now quarantined in the country. The virus has also emerged in small numbers across several other countries, including the US where 5 cases are now confirmed, infecting travelers who had recently been in Wuhan or other affected areas of China.
Airline stocks have plunged in the wake of the virus. While global economies and headline stock indexes historically recover from epidemic diseases after a few months’ time, companies in the travel and tourism industry, the earnings of which are directly impacted by travel bans and disruptions, usually bear the brunt of the hit. The Wall Street Journal Writes that European airlines in particular are getting punished, given that they are a key gateway into and out of China. Shares in British Airways -owner IAG and Lufthansa are down 13% and 9%, respectively, since the start of last week.
In the case of both the Ebola and swine-flu panics, travel stocks underperformed broader cyclical stocks―those that are particularly affected by economic busts―by almost 4 percentage points over the following three months.
By last Thursday, more than half of the 566 of the day’s previously flights scheduled from China’s Wuhan international airport were canceled. Cathay Pacific Airways Ltd. and China Airlines Ltd. are going as far as canceling flights in and out of Wuhan until the end of February. Refunds for cancelled flights to China can be redeemed up to January 31 for American Airlines and Delta Air Lines, and up to February 7 for United Airlines. If travel is to Wuhan, American and United extend the waiver through late March. This is a key period for flights to and within China, as it is usually time to celebrate the country’s lunar new year – the largest annual movement of people in the world. The Chinese government has postponed or cancelled celebrations across the country this year.
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