Boeing, Southwest stock downgraded as 737 Max troubles deepen. Shares slide

Key Points
  • Raymond James downgrades Southwest from the equivalent of a buy rating to a hold rating.
  • Bank of America also cuts Boeing to the equivalent of a hold.
  • Southwest has 34 Boeing Max jets out of its fleet of about 750 aircraft, accounting for roughly 4 percent of its passenger capacity.
A number of Southwest Airlines Boeing 737 MAX aircraft are parked at Southern California Logistics Airport on March 27, 2019 in Victorville, California. Southwest Airlines is waiting out a global grounding of MAX 8 and MAX 9 aircraft at the airport.
Mario Tama | Getty Images

Wall Street analysts downgraded shares of Boeing and Southwest Airlines on Monday as troubles worsen for the airplane maker's popular 737 Max jets.

Boeing announced late Friday plans to cut production of the jet, which has been grounded following the March 10 crash of an Ethiopian Airlines flight that killed all 157 people aboard. It was the second fatal crash of the popular aircraft in less than five months and investigators suspect that faulty data feeding into the aircraft's automated flight system played a major role in both accidents.

Shares of Boeing tumbled 4.1 percent while Southwest slid 2.7 percent in midday trading.

Boeing shares fall after Bank of America downgrades stock

Bank of America Merrill Lynch cut its rating on Boeing to neutral from a buy Monday, saying it expects production to be delayed by six to nine months.

Raymond James downgraded Southwest Airlines stock and lowered its earnings projections, citing concerns that the grounding could last through peak summer travel.

Southwest has 34 Max jets out of its fleet of about 750 aircraft, accounting for roughly 4 percent of its passenger capacity.

The airline, which reports earnings April 25, said it expects to lose $150 million in revenue in the first quarter of 2019 due to the Max groundings, among other factors like weather-related cancellations, maintenance issues and slowed travel demand. Raymond James said groundings were a "one time" situation, and it expects recuperation through maintenance credits or lower ownership costs of future aircraft.

American Airlines said it's extending cancellations of 90 daily flights involving the 737 Max jet by more than a month to June 5.

Raymond James downgraded Southwest from the equivalent of a buy rating to a hold rating, and lowered its earnings-per-share estimate by 5 cents to $4.40.

"The reputational loss from these events could erode long-term market share and pricing power of the 737 MAX," BofA analyst Ronald Epstein said in a note to clients. "A six-month delay also means lower margins due to penalties owed to customers, weaker negotiating position with airlines as airlines consider cancellations, and operational inefficiencies from the production disruption."

Boeing is slashing 737 Max production by 20 percent as it tries to find a software fix to get the jets back in the air. The company's shares have have fallen nearly 9 percent in the past month.

Boeing's Q2 will have profit losses, says aerospace analyst

Sheila Kahyaoglu, defense and aerospace analyst with Jefferies, told CNBC's "The Exchange" that Boeing will experience profit losses in its second quarter.

"There aren't many narrow-bodied aircraft options out there available, that's why this appears to be a transitory issue," Kahyaoglu said.

"What we watch out for longer term risk is the 777X certification, that's expected sometime in 2020, how that progresses. We are viewing this as a shifting free cash flow from 2019 and doing our best to keep 2020 intact."

Despite the groundings, Raymond James said it's confident in Southwest's overall ability to maintain "longer term superior margins, FCF profile, and low leverage while capitalizing on technology catch-up and international growth opportunities."

The groundings will likely have less impact for American and United since those airlines have fewer 737 Max jets than Southwest, the report noted.