Boeing 737 MAX Grounding Hurts US Carriers Despite Tailwinds

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SkyWest's (SKYW) block hours rise in June due to the addition of E175, CRJ900 and CRJ700 aircraft to its fleet since June 2018.

Southwest Airlines LUV is the latest carrier to have extended its Boeing 737 Max grounding period. With the Federal Aviation Administration (FAA) still skeptical about the exact timing of the aircraft’s return to service, the low-cost carrier recently stated that it will cancel approximately 100 flights a day through Sep 2. Previously, the low-cost airline suspended the 737 MAX flights from its schedule until August 5.

Earlier in the month, American Airlines AAL announced the extension of its 737MAX jets through Sep 3. The carrier had initially notified that 737 MAX jets would be grounded until Apr 24, which was later stretched through Jun 5 and again until Aug 19. (Read more: American Airlines Extends 737 MAX Grounding Period Once More)

These groundings started in March following two successive fatal air crashes in Indonesia and Ethiopia that caused the death of 346 passengers. While Boeing is said to have fixed the software issue, which allegedly triggered the deadly crashes, the airline manufacturer is yet to make a formal submission of its changes and software upgrades to the FAA for approval.

Amid uncertainty surrounding the 737 MAX aircraft’s return to service, chances are that United Airlines, the subsidiary of United Continental Holdings UAL, might trace the path of Southwest and American Airlines in extending the Boeing 737 MAX flight cancellations through September. Last month, the airline stated that it will expand the 737 MAX flight suspension phase until August. (Read more: United Airlines Extends 737 MAX Flight Cancellation Period)

What’s the Impact?

For Southwest Airlines, the 737 MAX groundings have been taking a substantial toll on its operations, disrupting schedules only a week after the initiation of its long-awaited Hawaii flights. Ever since the groundings, fight cancellations and the consequent drop in capacity have been weighing on the company’s non-fuel unit costs. Moreover, with 34 737 MAX jets in fleet, the carrier’s summer travel season might be significantly impacted by the extended grounding period.

Meanwhile, with 24 Boeing 737 MAX jets in fleet, this April, American Airlines stated that it expects the current-year pre-tax earnings to be affected to the tune of roughly $350 million on account of the groundings. The amount of loss is likely to go up with the extension in Boeing 737 MAX grounding period. Notably, the company had warned of an estimated loss of $180 million for a full quarter in case the grounding period was extended beyond August.

United Airlines has a slightly less exposure to the 737 MAX model, which caused the fatal air crashes. In fact, the carrier does not own any Max 8 jets but has 14 Max 9s, which are a tad longer than the MAX 8s. Ever since the 737 MAX aircraft’s grounding in mid-March, the carrier had to call off approximately 3,300 flights. In June and July, the airline is likely to face around 2,400 flight cancellations due to the expanded flight suspension period.

Each of the stocks mentioned above except American Airlines carries a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Airlines carries a Zacks Rank #5 (Strong Sell).

Some Boons Amid Banes

Although the extended grounding period by major US carriers signal a downtrend, the industry currently has several tailwinds on its side. Demand for air travel has been steadily rising, leading to higher passenger revenues, the key top-line source for airline players. For instance, Delta Air Lines DAL was responsible for flying more than 2.1 million passengers without a single mainline cancellation in the Memorial Day weekend last month (May 24-27 period). In fact, a record 666,769 passengers were transported on May 24. Modest oil prices further add to the positivity as fuel costs comprise a major chunk of airline expenditures. Buoyed by these upsides, the industry participants are well equipped to overcome these short-term adversities.

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