The 737 Max grounding will cost Alaska Airlines $150 million

InvestingJan 30, 2024

The grounding of the 737 Max 9 after a January 5 incident that blew a hole in the side of an Alaska Airlines plane earlier this month will cost the airline about $150 million, Alaska announced Thursday.

The loss is significant to an airline the size of Alaska, which reported on Thursday an adjusted income of $38 million in the final three months of the year and $583 million for the full year. The fourth quarter income was better than forecast for Alaska.

The door plug blew off an Alaska Airlines flight on January 5, leaving a gaping hole in the side of the plane. While no passengers were killed, the incident led the Federal Aviation Administration to order a grounding of all 737 Max 9 jets. With 65 of the planes Alaska has the second most 737 Max 9 jets in its fleet, behind only United, which has also warned it expects a first quarter loss at least partly due to the cost of the grounding.

On Wednesday, the FAA spelled out inspection procedures to return the planes to flight. Alaska Air said the first of its grounded jets will be back in service on Friday with more planes added every day as reviews are completed and each aircraft is deemed airworthy.

“We expect inspections on all our 737-9 Max to be completed over the next week,” it said.

The cost to Alaska Air is primarily from lost revenue, as the cost to compensate customers for hotels when their flights are canceled and overtime for staff will be balanced by the fuel savings achieved by flying 3,000 fewer flights.

Alaska could ultimately pass the cost onto Boeing, as CFO Shane Tackett told investors Thursday that “we fully expect to be made whole for the profit impact of the grounding.” But he said there are no details of that compensation as of yet.

The airline also expects that most passengers will be willing to return to the 737 Max 9 once it starts flying again.

“I think at first, people will have some questions, some anxiety just like they did two years ago,” Alaska CEO Ben Minicucci said, referring to when all models of the Max were approved to fly again following a 20-month grounding precipitated by two fatal crashes. “But I believe over time, the confidence will get back into this airplane.”

The airline said Thursday that even if the planes return to service as planned, it will have had to cancel about 3,000 flights this month due to the grounding reducing its overall capacity by about 7% for the quarter as a whole.

Minicucci told NBC in an interview Tuesday that the carrier found “some loose bolts on many” Boeing 737 Max 9 during its inspections.

But when asked during an investors call Thursday if he was reconsidering the airline’s decision to buy only Boeing aircraft going forward, he would not back off those plans.

“We have a long-standing deep relationship with Boeing. But like I said, it’s not acceptable what happened. We’re going to hold them accountable, and we’re going to raise the bar on quality on Boeing,” he said. “We got 231 737s that we’ve been happy with. And until the incident, we were happy with the Max. We have 185 on order that are coming to us. We believe with the network configuration we … have, the Boeing airplane is 737 is well suited for our network. So that is the long-term plan, but we’re going to hold Boeing’s feet to the fire to make sure that we get good airplanes out of that factory.”

Even with the $150 million hit from the grounding, Alaska said it still expects to report a full-year 2024 profit of about $381 million to $635 million, but that guidance suggests it could fall short of estimates of $583 million, according to analysts surveyed by Refinitiv. Analysts are forecasting a loss of $79 million in the first quarter.

Alaska and United are the only US airlines with the 737 Max 9 jet in their fleets. But it doesn’t mean they’re the only affected by the problems at Boeing.

Southwest Airlines said Thursday that it now expects fewer 737 Max deliveries from Boeing this year than it had booked because one of the models it orders, the 737 Max 7, has yet to be certified by the FAA. Its order book calls for the delivery of 27 of the Max 7 this year, along with 53 of the Max 8, but the airline said that “should no longer be relied upon.”

“The FAA will ultimately determine the timing of the [737 Max] 7 certification and entry into service, and the company therefore offers no assurances that current estimations and timelines are correct,” it said.

Southwest CEO Bob Jordan said the airline is no longer counting on any of the 737 Max 7 planes being delivered in 2024 but that it will be ready to change which planes it gets from Boeing.

“If we don’t get the Max 7, we’ll take a Max 8,” he said in an interview on CNBC. He said it’s not clear what the FAA decision announced Wednesday to limit the growth of 737 Max production going forward will have on its deliveries.

“As always, if there’s an adjustment, we’ll adjust,” he said. “Again, I support that [limitation]. Anything that helps Boeing improve quality, address the issues, is good for Boeing, and it is good for Southwest Airlines.”

American Airlines CEO Robert Isom said he doesn’t expect a delay in the deliveries of the planes it is due to get from Boeing this year. But he also had criticism of the aircraft maker.

“We need them to produce a quality product every time. We need everyone at Boeing getting their act together. It’s just essential,” he said in an interview on CNBC. “It’s not acceptable. We don’t need the distraction.

Southwest does not have any 737 Max 9 jets, the one that was grounded this month, nor orders to buy any. But it does have more than 200 of the 737 Max 8, making up about a quarter of its fleet. CEO Bob Jordan said his airline, which flies nothing but Boeing 737’s, said he doesn’t believe that passengers will be reluctant to book on his airline due to its use of Boeing and 737 Max jets.

“Our customers want confidence in our product. They have a lot of confidence in Boeing, just like I do,” he said on CNBC. “The Max 8 is a terrific aircraft. I have confidence Boeing will address the issues. And our customers have a lot of faith in Southwest Airlines.”

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