Costs pile up for airlines as Boeing 737 Max grounding enters eighth month
- Costs are piling up for airlines as the 737 Max heads into its eighth month.
- The planes have been grounded since mid-March after two crashes killed 346 people.
- Boeing's board stripped CEO Dennis Muilenburg of his chairman role so he can focus on getting the planes back.
The worldwide grounding of the Boeing 737 Max, now in its eighth month, is driving up costs for airlines as they cancel thousands more flights into 2020.
American and United this week joined Southwest in removing the planes, grounded since mid-March after two fatal crashes killed 346 people, from their schedules until January.
Boeing executives have said they expect aviation regulators to clear its best-selling plane to fly again in the fourth quarter, but the Federal Aviation Administration said it has no firm timeline for lifting the grounding.
That has forced airlines to repeatedly push back when they expect the planes to return to their fleets. The resulting lost revenue is denting airline profits and dashing their growth plans. The capacity constraints are also becoming a bigger headache for travelers, which in addition to facing canceled flights, are getting bumped more frequently.
The impact is becoming more pronounced as the grounding continues longer than expected. Airlines not only lack access to the more than 370 Max jets that were in fleets worldwide at the time of the grounding but also the hundreds more they expected Boeing to deliver this year. The fuel-efficient planes are a key part of these airlines' growth strategies.
American Airlines on Wednesday said it canceled 9,475 flights in the third quarter because of the grounding order, which hit its pre-tax income by about $140 million. It expects to cancel 140 flights a day until it expects the planes to return, which would mean more than 14,000 cancellations in the fourth quarter and early January.
American reports earnings on Oct. 24. The airline had 24 of the 737 Max jets in its fleet at the time of the grounding and has 76 more on order.
Airlines are canceling flights ahead of time to avoid having to give complementary last-minute, alternative flights, trips that fetch a premium.
"That's a close-in fare that another passenger is not paying," said Credit Suisse airline analyst Jose Caiado. "I think they explicitly want to avoid doing that around Christmas and New Year's."
Airlines are trying to use similar or larger aircraft to rebook travelers and limit disruptions.
Even if regulators deem the planes airworthy again, airlines need at least a month to train pilots and perform maintenance work on the planes before passengers can fly them.
Boeing took a $4.9 billion after-tax charge in the second quarter to cover compensation to airlines affected by the grounding. It has developed software fixes for the 737 Max after crash investigators implicated an anti-stall system that misfired, repeatedly pushing the nose of the planes down in both disasters — a Lion Air flight in October 2018 and an Ethiopian Airlines 737 Max in March — but it hasn't yet handed it over to regulators for review.
American's CEO Doug Parker said the carrier has had conversations with Boeing but doesn't have a firm number compensation figure yet.
"It's hard until we know when the airplane is really going to be back in service to ascertain what the damages are," he said in an interview.
On Friday, Boeing said its board stripped CEO Dennis Muilenburg of his chairman role so he can focus on getting the Max back to service.
The rising costs don't only apply to airlines with Max planes in their fleets. Delta Air Lines doesn't have any Maxes and it won market share from airlines hamstrung by the grounding. In "the second quarter as well as the third quarter, we certainly were a beneficiary of the MAX not operating,' CEO Ed Bastian said on an earnings call Thursday. That, along with higher travel demand in general spurred more flying, driving up its non-fuel costs, mainly in employee wages. The airline said it plans to hire 12,000 workers, including more pilots and flight attendants, through the end of next year.
When the Max returns, it may not be all good news for U.S. carriers, whose stock is already underperforming the broader market.
That added capacity could drive down fares, said Credit Suisse's Caiado.