October 24, 2019 / 11:47 AM / a month ago

American, Southwest overcome 737 MAX travails with quarterly profit growth

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

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 crashes in Indonesia and Ethiopia that 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.

Southwest and American are the largest U.S. operators of the 737 MAX, with 34 and 24 MAX jets in their fleets respectively at the time of a March safety ban that has also frozen deliveries of dozens more aircraft that were on order for this year.

That has led to more than 100 daily flight cancellations at both airlines into early next year and constricted their growth plans, while rivals like Delta Air Lines Inc (DAL.N) pick up market share.

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

The low-cost carrier is preparing for some “uneasiness” from a small number of customers in the early days of a 737 MAX return, the timing of which remains uncertain, but Kelly said the majority of its customers had indicated they would not change their flying behavior based on aircraft type.

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 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.

American shares rose 3.8% to $29.375 and Southwest shares were up 5.2% at $56.02.

COST HIT

With 737 MAX jets still parked pending Boeing’s software updates and regulatory approval, airlines have been forced to continually revise their flying schedules and growth plans.

American trimmed the top end of its adjusted 2019 forecast to $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 from $400 million.

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 MAX safety ban, bringing the nine-month total to an estimated $435 million.

Boeing, which has faced increasing concerns in the past week over how the MAX was developed and certified, has set aside $5.6 billion in part to cover potential payments to customers for MAX-related damages.

Southwest has based its low-cost business model on operating an all-Boeing 737 fleet, a strategy that Kelly has said could be reviewed in the future.

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.

The American Airlines’ pilots union is also demanding compensation for lost wages but has not filed a lawsuit.

Reporting by Tracy Rucinski in Chicago and Sanjana Shivdas in Bengaluru; Editing by Nick Zieminski and Peter Cooney

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