October 24, 2019 / 12:10 PM / 9 months ago

American, Southwest profits rise on strong demand even as 737 MAX hurts

(Reuters) - American Airlines Group (AAL.O) and Southwest Airlines (LUV.N) posted quarterly profit increases on Thursday even as the two U.S. carriers pointed to a rising cost impact from the continued grounding of Boeing 737 MAX.

FILE PHOTO: An American Airlines jet takes off from Washington National Airport in Washington, U.S., August 9, 2017. REUTERS/Joshua Roberts/File Photo

With slimmer fleets and fewer seats to sell, both airlines have been able to charge higher fares thanks to robust U.S. travel demand.

Both companies said they remained in negotiations with Boeing Co (BA.N) over compensation for the 737 MAX grounding, now in its eighth month following two deadly crashes in Indonesia and Ethiopia that together killed 346 people.

“We’re working to ensure that Boeing shareholders bear the cost of Boeing’s failures, not American Airlines’ shareholders,” American Chief Executive Doug Parker said on a conference call.

American shares rose 2.4% to $28.98 and Southwest shares were up 4.3% at $55.51.

Boeing has set aside $5.6 billion in part to cover potential payments to customers for MAX-related damages as its global fleet remains parked.

Southwest and American, with 34 and 24 MAX jets in their fleets and dozens more on order, have been forced to cancel more than 100 daily flights into early next year with not enough aircraft to meet demand as Boeing works on software and training updates to win regulatory approval for the planes to fly again.

As a result, the two airlines’ network growth remains strained compared to rivals like Delta Air Lines (DAL.N) which does not operate the MAX.

“We’re temporarily losing some share, which we don’t like,” Southwest Chief Executive Gary Kelly told analysts on a conference call.

Some analysts have expressed concern of over-capacity once the 737 MAX returns, which could drag down fares, but U.S. airline customers have said they still want delivery of the fuel-efficient jets as soon as possible.

Meanwhile, costs related to the grounding continued to grow.

American trimmed the top end of its adjusted 2019 forecast at $5.50 per share versus its previous forecast range of $4.50 to $6 per share and raised the estimated costs related to the MAX grounding to $540 million for the year.

Southwest did not provide a full-year profit forecast but said it took a $210-million hit to operating income in the quarter from the ongoing MAX safety ban, bringing the nine-month total to an estimated $435 million.

Southwest, which has based its low-cost business model on operating an all-Boeing 737 fleet, said it could not provide any capacity guidance for 2020 as a the MAX’s return to service remains uncertain.

Kelly has said he is open to diversifying its fleet in the future but that such a decision is complex.

The Southwest Airlines Pilots Association (SWAPA) filed a lawsuit against Boeing this month, alleging that the planemaker “deliberately misled” the airline and pilots about its 737 MAX aircraft and demanding over $100 million in lost wages.

Southwest’s net income rose to $659 million, or $1.23 per share in the third quarter from $615 million, or $1.08 per share, a year earlier on a 1.1% rise in operating revenue to $5.64 billion.

Net income at American, whose pilots are also demanding compensation for lost wages but have not filed a lawsuit, rose to $425 million, or 96 cents per share, from $372 million, or 81 cents per share, a year earlier. Total operating revenue rose 3% to $11.91 billion.

In addition to disruption from the 737 MAX, American is in prolonged contract negotiations with its mechanics.

Reporting by Sanjana Shivdas in Bengaluru and Tracy Rucinski in Chicago; Editing by Anil D'Silva and Nick Zieminski

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