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FAA grounding of Boeing Max jets curtails Southwest profits

Updated January 23, 2020 - 8:44 am

The busiest commercial air carrier operating at McCarran International Airport in Las Vegas continues to be handicapped by the grounding of the newest version of its workhorse Boeing 737 jets.

Dallas-based Southwest Airlines, which operates 228 flights a day between Las Vegas and 54 cities — by far, the most of any airline — has collected an undisclosed settlement from Chicago-based Boeing for the Federal Aviation Administration’s grounding of its twin-engine 737 Max jets on March 13.

Southwest, American and United Airlines are the carriers affected most by the Max grounding.

Southwest Chairman and CEO Gary Kelly said Thursday the compensation for estimated 2019 damages from Boeing enabled Southwest to return $2.4 billion to shareholders in dividends and stock repurchases and allowed the company to provide a record $667 million in profit sharing to employees for the year.

Southwest has an estimated 3,546 employees in the Las Vegas area and uses 24 gates at McCarran.

$828M loss in income

The airline estimated an $828 million reduction in operating income, about 19 cents per share, and suffered a rare decline in net income and earnings per share in the fourth quarter that ended Dec. 31. Southwest missed analysts’ estimates of $1.09 per share by 11 cents a share, but 2019 was the airline’s 47th consecutive profitable year.

“We currently have 34 Max aircraft in our fleet and at the beginning of last year, we expected to have 75 at the end of 2019, and another 38 deliveries in 2020,” Kelly said in a statement. “With the ongoing uncertainty regarding the timing of the Max return to commercial service, we remained nimble and adjusted our 2019 plans, as necessary, without abandoning our long-term goals.”

Many of the company’s long-term goals involved the rollout of service from the West Coast to Hawaii. The airline has indicated that it has contemplated nonstop service from McCarran to Hawaiian airports, which are within range of Max jet capabilities, but the grounding of the jet put an end to those discussions as the airline used other models in its 737 fleet to fly from San Diego, Oakland and Sacramento, California, to Daniel K. Inouye International Airport in Honolulu, Kahului Airport on Maui, Lihue Airport on Kauai, and Ellison Onizuka Kona International Airport at Keahole.

Southwest also plans new service to Cozumel International Airport in Mexico in March. It also expects to bolster its service with additional flights to and from Denver, Baltimore and Houston.

More Boeing compensation possible

Kelly indicated Southwest may receive more compensation from Boeing.

“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. No estimated settlement amounts relating to financial damages beyond 2019 have been factored into our 2020 outlook. We recently extended the Max-related flight schedule adjustments through June 6, 2020. Based on recent guidance from Boeing estimating that the ungrounding of the Max will be mid-2020, we will likely extend Max-related flight schedule adjustments further to provide operational reliability and a dependable flight schedule for our customers booking their summer travel.”

Kelly said once the FAA order to ground the Max fleet is lifted, the company’s priority would be to return its 34 Max 8s to the air “in a safe and controlled manner.”

It will then prepare to resume deliveries from Boeing on delayed aircraft orders, but will rely on FAA guidelines and timetables to determine the plane’s return to service.

Southwest shares closed up 3.57 percent, or $1.91, to $55.40 Thursday.

Contact Richard N. Velotta at rvelotta@reviewjournal.com or 702-477-3893. Follow @RickVelotta on Twitter.

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