Southwest had a mess of a year because of the 737 Max, and it’s only going to get worse — but there are a few bright spots

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REUTERS/Mike Blake
  • Southwest Airlines reported fourth quarter and full 2019 earnings following a tumultuous year without its flagship plane, the Boeing 737 Max.
  • The airline is the biggest customer of the 737 Max, and was supposed to have 75 by the end of 2019.
  • Although profits and capacity fell, and headwinds look poised to continue well into 2020, there were still a few bright points, including a nimble and efficient operations performance, despite the challenges.
  • Visit Business Insider’s homepage for more stories.

Southwest reported its fourth quarter and full year 2019 earnings on Thursday, and at first glance, news was bleak thanks to the Boeing 737 Max

The airline’s fourth-quarter profit tumbled more than 21 percent, largely a result of increased costs caused by the grounding of the 737 Max.

Southwest has more of the troubled plane in its fleet and on order than any airline, including American and United – the other two US airlines that operate the plane. The 737 Max has been grounded worldwide since March 2019, following the second of two fatal crashes.

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.

Despite the profit fall-off, there was an operation bright side, according to Robert Mann, an airline consultant and former executive.

“Given the lemons they were dealt, over and over again, they made a mighty fine lemonade,” he said of Southwest.

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 “effectively 75% of our airplanes” were grounded, Gary Kelly, Southwest’s chairman and CEO, said in a conference call with investors on Thursday.

It “presents a crisis-like challenge, and our people are ready for it with the best planning, tools and technologies, but more importantly with the right fortitude and the right resolve to get through the crisis,” he added.

Although Southwest has reached a settlement with Boeing for compensation related to the grounding through 2019, Kelly warned that there would still be negative effects through 2020 until the plane reenters commercial service.

“I am pleased with the Boeing agreement for 2019,” he said. “But, we continue to incur financial damages in 2020, and we will continue discussions with Boeing regarding further compensation.”

The operational and other financial challenges are also expected to remain until the plane flies again.

“The outlook continues to be negatively impacted by the grounding of the Max,” Cowen analyst Helane Becker said, according to Reuters.

The airline said it expects capacity to fall 1.5 to 2 percent in the first quarter, and declined to make a full-year forecast due to the uncertainty surrounding the Max.

Southwest has struggled to maintain operational reliability due to the Max grounding, and has been forced todefer=”defer”retirements of some older 737-700 aircraft, as well as rework its schedule to focus on short-haul flights and connections as opposed to point-to-point longer-haul missions, Kelly said. The airline is also exploring purchasing older 737s on the used market to help it through the rest of the grounding.

Southwest was able to keep operations relatively consistent, and saw annual revenue per available seat mile (RASM) – a key airline metric – increase 3.7 percent over the previous year, but the airline’s seat capacity fell 1.6% in 2019 due to the grounding, versus the five percent growth it had planned.

The diminished capacity – and lack of growth – was demonstrative of the outsized impact the Max has had on Southwest. The airline operates only one type of plane, the Boeing 737, with several different variants, and its growth plans are entirely reliant on the Max. In a normal environment, that fleet commonality helps reduce costs and streamline operations.

“This sort of illustrates the risk of having all of your eggs in one basket,” Kelly said.

Although he did not suggest any plans to change that strategy in the future, he suggested it was something that the airline was open to looking at.

“We’re going to explore the risk-reward and having a single fleet type and single supplier,” he said.

There was a bright financial note, according to chief financial officer Tammy Romo. The airline had more cash on hand than normal, in large part because it had not made any payments to Boeing since the grounding began.

“We haven’t been making aircraft delivery payments since mid-March 2019,” she said. “Delayed delivery payments also lowered our capital expenditures to $1 billion, versus our original plan of 1.9 to 2 billion.”

Additionally, Kelly said that the airline had not deferred any of its capital projects due to the grounding, giving it a strong footing going into 2020. Some of those projects include a new maintenance hangar in Houston and upgraded hangars elsewhere. This could help the airline avoid mechanical outages on older planes, which would further squeeze the airline’s capacity.

Southwest currently has the Max removed from its schedule through the first week of June, but it said that, based on Boeing’s forecast that the plane won’t return before June or July, that delay would likely be pushed back even further.