Southwest Boeing 737 MAX 8 Southwest Airlines

The MAX Giveth And The MAX Taketh Away

Southwest Airlines' income was hit by the MAX grounding, but its unit revenue and load factor rose.

With 34 Boeing 737 MAXs in its fleet, Southwest Airlines should have registered the maximum impact of any airline from the MAX grounding. The grounding certainly hurt, costing Southwest $175 million in operating income in the second quarter alone, according to CEO Gary Kelly. But there are some offsetting effects, and the low-cost giant still did very well in the latest quarter, with net income of $741 million on operating revenues of $5.9 billion. Overall, the airline had an operating margin of 16.4% and a net profit margin of 12.5% in the second quarter. There are a lot of airline CEOs who would drool over those kind of results.

One helpful development was that Southwest settled its dispute with its mechanics in the second quarter, unlike American Airlines. Kelly credited employees with a “heroic job managing approximately 20,000 flight cancellations under operationally difficult circumstances.”

And Boeing has recorded a $4.9 billion after-tax charge for disruptions related to the 737 MAX grounding. While Southwest has not counted any of these chickens yet, when they come home to roost, they could be profitable poultry for Southwest and other MAX-dependent airlines.

The best news, of course, was a healthy revenue environment, which helped increase Southwest’s unit revenue 6.8% year-over-year. With MAXs grounded, the airline tended to curtail its least popular routes and flights. That also boosted unit revenue, and load factor hit an all-time quarterly high of 86.4%.

On the other hand, shrinking the network 1-2% does drive up unit costs, and Kelly expects “unit cost penalties for second half 2019 due to the MAX groundings.”

However, the MAX did free up capital—never in short supply at Southwest. The airline now estimates its capital expenditure in 2019 will be only $1.2 billion to $1.3 billion, compared with previous estimates of up to $2 billion.

Based on guidance from Boeing, Southwest is assuming regulatory approval of MAX return to service during the fourth quarter 2019. It is extending its MAX-related schedule adjustments through January 5, 2020. Following FAA ending the grounding, Southwest estimates it will take one to two months to comply with FAA directives, including new pilot training.

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