AAL American Airlines Group Inc

By Alison Sider 

Two major airlines said on Thursday that they are facing a rising price tag from higher costs and lost revenue as the grounding of the Boeing Co. 737 MAX stretches into its eighth month.

Southwest Airlines Co. said the grounding reduced its operating income by $435 million in the first nine months of the year and by $210 million in the third quarter. The airline expects the impact to spill into 2020.

American Airlines Group Inc., which also reported third-quarter results, said it expects the grounding to drag down its full-year pretax profits by $540 million, up from the $400 million impact it previously anticipated.

Both airlines are negotiating with Boeing to recoup their losses. American Airlines' Chief Executive Doug Parker said he was confident that ultimately Boeing's shareholders -- not American's -- would pay for the grounding.

Still, the carriers said strong demand for travel helped boost revenue during the quarter, even though they have had to curtail growth plans. Gary Kelly, Southwest's CEO, said bookings are healthy, bolstering the carrier's outlook even though the airline won't be able to fly as much as it planned to during the coming holiday season.

American's revenue grew 3% during the quarter. But the airline lowered the high-end of its full-year adjusted-earnings guidance to $5.50 a share from $6 a share. The low-end of the range is $4.50 a share.

Both carriers' shares rose Thursday morning. American shares were up 1.6% to $28.74, and Southwest rose 4.5% to $55.64.

The MAX has been grounded globally since March following a second fatal crash in less than five months, forcing airlines to cancel thousands of flights and miss out on the revenue they would have brought in.

Southwest is the biggest MAX customer, with 34 in its fleet and 41 that were due to arrive this year. American had 24 MAX jets at the time of the grounding.

"We're not happy about our situation," said Mr. Kelly, speaking on CNBC Thursday morning. "We put our future in the hands of Boeing and the MAX, and we're grounded," he said.

Mr. Kelly said that Southwest's board has asked him to look next year at whether the carrier needs to diversity its all-Boeing fleet.

Airlines that fly the MAX have spent much of the year waiting for Boeing to make software fixes and for regulators to sign off. The plane's expected return has slipped several times, with each delay requiring carriers to cancel flights and rebuild schedules.

The past week has been particularly tumultuous, with lawmakers and regulators raising fresh concerns about how the MAX was developed and certified. Some worried that the disclosure of a former Boeing pilot's internal messages, suggesting he had encountered trouble during tests in a simulator in 2016 and had unknowingly misled regulators in his work on the MAX, could derail progress toward the plane's return to service.

Boeing on Wednesday said that it still believes it can secure regulatory approval for the return of the MAX this year. Airlines say it may take another month or two to work through training and prepare stored planes to fly, and the carriers aren't taking their chances with holiday travel schedules. American and United Airlines Holdings Inc., which also flies the MAX, have removed the plane from their schedules until January, while Southwest has taken it out until February.

Mr. Parker said Boeing's belief that the MAX will be certified to fly again this year is encouraging but probably a best-case scenario, given previous delays. American plans to phase the MAX back in slowly, beginning with just five planes starting in mid-January.

"We're frustrated," he said, adding that the current timing could change again.

For travelers, the grounding has meant fewer flight options and other inconveniences, like changes to long-planned trips as the MAX's return date has been pushed out. American and Southwest have both said the grounding has contributed to a rise in denied boardings as they have been forced to accommodate passengers on a smaller number of planes.

Some analysts have said the absence of the MAX likely resulted in fares that were higher than they otherwise would have been.

Mr. Kelly said Southwest hasn't reached a compensation settlement with Boeing, which took a $5.6 billion pretax charge earlier this year to cover potential payments to customers that could include discounts and services as well as cash payments.

Investors have started to become anxious that whenever the MAX does return to service, it will result in a flood of new capacity hitting the market as demand for travel starts to slow. At the same time, airlines' costs are poised to climb due to new labor deals being worked out.

American also said it is taking steps to avoid a repeat of this summer, when its operation was hobbled by high rates of cancellations and delays. The carrier pinned much of the blame for that on strife with the unions that represent its mechanics, alleging in a lawsuit that the union is encouraging a work slowdown. Union leaders have denied that they are encouraging a coordinated slowdown, but American has said the situation has started to improve since a federal judge in August ordered the unions to resume normal work levels. The two sides have returned to the negotiating table.

Southwest posted earnings of $659 million, or $1.23 a share, up from $615 million, or $1.08 a share, in the comparable quarter last year. Analysts polled by FactSet were expecting $1.09 a share.

American reported a profit of $425 million, or 96 cents a share, up from $372 million, or 81 cents a share, a year earlier. Adjusted earnings were $1.42 a share, ahead of the $1.40 a share analysts were expecting.

--Patrick Thomas and Dave Sebastian contributed to this article.

Write to Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

October 24, 2019 11:56 ET (15:56 GMT)

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