737 Max grounding will cost American, Southwest Airlines over $1B

October 25, 2019

 

News regarding the grounding of the Boeing 737 Max continues to rumble on after the aircraft was grounded worldwide last March following two accidents which resulted in the loss of 346 lives. Reported on CNN and Channel 3000 is that costs to American and Southwest airlines will be at least $1 billion between them and that is expected to climb.Boeing has already set aside $5 billion to compensate its airline customers because of the 737 Max grounding. This figure is meant to cover costs for all airlines, with a combined 387 Max planes in their fleets at the time of the grounding. In addition, the manufacturer had been scheduled to deliver more than 400 737 Max jets by the end of the year. These deliveries were also halted by the groundings.

Image: Boeing 737 Max aircraft stored at Boeing's Seattle plant (Channel3000)

 

Southwest said the seven-month grounding cost it $435 million through to the end of September. It has 31 of the troubled jets, more than any other Boeing customer and the airline suggests the costs will continue to mount in the fourth quarter and into next year. American, which has 24 of the jets, said it forecasts that the full-year blow to its pre-tax profit will be $540 million and the carrier has cancelled 9,500 flights due to the grounded jets in the third quarter alone. Southwest said it will continue to negotiate with Boeing about compensation the airline will receive for its lost revenue and profits. 

  With two major airlines reporting more than $1 billion in lost profits between them, a large gap could exist between what airlines are losing due to the crisis and what Boeing has told investors it will have to pay in the way of compensation. United Airlines for example, which has 14 of the 737 Max planes in its fleet, has not given an estimated cost of its losses.

  Boeing continues to expect approval to fly the jets again by end of this year, although it has consistently fallen behind its own timeline. The US Federal Aviation Administration (FAA) said Friday that there is no timetable for the approval to fly again.

  But Southwest have said that even once the aircraft is approved to fly again, it will take some time before it is able to use them to carry passengers. Once it gets approval to fly the type, the airline estimates it will take one to two months to comply with FAA directives, including pilot training. This is why Southwest removed the 737 Max from its flight schedule until February 8, 2020. American's flight cancellations at this time only extend until January 15 next year.

  Despite the losses attributed to the missing jets, Southwest reported strong earnings for the third quarter Thursday. Revenue rose 1%, and profits rose 7% compared to year earlier results, topping forecast. American also reported improved earnings, although it fell short of both Wall Street forecasts and its own expectations.

 

In addition to the losses to the airlines, the Southwest pilots union is suing Boeing, hoping to recover more than $115 million in lost wages for its members. The union says compensation is due because of the grounding of the aircraft

  Southwest Airlines Pilots Association, in a complaint filed last Monday on behalf of the pilots, claims Boeing 'deliberately' misled pilots about the safety of the aircraft. It also alleges the grounding of the 737 MAX has reduced the pilots' opportunities for work. This has already resulted in lost salary payments to pilots, the complaint states, and the grounding is still ongoing.

  The union says $115 million in damages will cover the wages pilots are set to lose by the end of the year, as well as 401(k) contributions, sick leave accrual and profit sharing.

  "It is critical that Boeing takes whatever time is necessary to safely return the MAX to service," Jonathan Weaks, president of the union, said in the statement. "Our pilots should not be expected to take a significant and ever-expanding financial loss as a result of Boeing's negligence."

  The complaint alleges Boeing decided to 'rush' the 737 MAX to market for the sake of profits and in doing so, "abandoned sound design and engineering practices, withheld safety information from regulators and deliberately misled its customers, pilots and the public" about design changes from previous versions of the 737 aircraft.

  Boeing has already taken a huge financial blow from its troubles with the 737 MAX. In the most recent quarter, Boeing reported its largest loss ever — a $3.7 billion adjusted loss — as a result of the grounding. The company has also said it will set up a fund to distribute $100 million to the families of people who died in the crashes.

  "Boeing has the greatest respect for the men and women who fly for Southwest Airlines," a Boeing spokesperson said in a statement. "While we value our long relationship with [the pilots union], we believe this lawsuit is meritless and will vigorously defend against it. We will continue to work with Southwest Airlines and its pilots on efforts to safely return the MAX to service."

  The two accidents has forced Boeing to undergo a re-certification process for the aircraft, and pushed the Federal Aviation Administration to review its process for approving planes for flight. Boeing has expressed hope that the 737 MAX will be able to operate again before the end of this year, though the grounding forced Southwest to cancel some 180 daily flights until January 5.

  Southwest was hit especially hard by the grounding because it is the largest operator of the 737 MAX, according to the union's release. It states that more than 30,000 Southwest flights have been eliminated as a result of the defective plan, contributing to an estimated 8% decline in the airline's passenger service by the end of 2019.

  The move could also set the stage for lawsuits from other airlines' pilots, as the grounding was felt widely across the industry. In September, American Airlines said it would be forced to cancel 140 flights per day until December 3 and had previously decided to drop a route entirely as result of the grounding. 

 United Airlines has pushed back its flight cancellations due to the Boeing 737 Max grounding until December 19, from a previous date of November 3. Cancelling more than 90 daily flights this far in advance will make it easier to accommodate affected passengers on different flights.

  Boeing is still promising that it will have a software fix for the plane to the FAA by early next month, and that it expects to win approval for the plane to fly again shortly. The airlines however are finding it difficult to schedule flights until they know for certain that the aircraft can be returned to service. Even after approval, it'll take some time to add flights, as pilots will need to further training on the new safety procedures, and the airlines will want time to sell seats on the flights they plan to add.

(Boeing)

 

A Russian company that leases aircraft is suing Boeing over the plane maker's grounded 737 Max 8 jets. It is the first Boeing customer to sue over the grounding.

  Avia, which agreed to buy 35 of the planes, claims Boeing breached the contract by misrepresenting how safe the plane was to fly, and alleges it put profits ahead of safety, as it competed with rival Airbus for market share.

  Boeing "represented that the 737 Max 8 was an airworthy and safe aircraft, and that it had been designed in compliance with aviation regulations," Avia said in its lawsuit, which was filed last Monday in an Illinois court as Boeing has its headquarters in the state. "Despite its representations and due to its negligent conduct, Boeing manufactured and designed an aircraft that was not safe for flight." The suit was first reported by the Financial Times and Boeing declined to comment on the lawsuit.

  The delivery of 33 of the planes that Avia ordered was rescheduled last year, although the lawsuit does not make clear why. They are now scheduled for delivery some time between 2022 and 2024, instead of between 2019 and 2022 as originally planned, according to court documents.

  Avia now wants to cancel its order. The company asking for more than $115 million to account for losses and damages it says were caused by what it called Boeing's "wrongful acts and omissions." Avia is also seeking punitive damages.

  Avia also alleges that Boeing "downplayed and misrepresented" problems after a Max flown by the Indonesian carrier Lion Air crashed last year. Another Max flown by Ethiopian Airlines crashed several months later.

  'As a result, and in reliance on Boeing's misrepresentations regarding the airworthiness of the subject aircraft, Avia continued to abide by the terms' of its purchase agreement, according to court documents. Avia said it was "unable to make an informed decision" with regard to the way it did business with Boeing.

"We are committed to seeing this through, if necessary, to trial, to pursue not only our compensatory damages but also punitive damages given Boeing's outrageous conduct," said Steven Marks, an attorney representing Avia. Marks also represents more than 30 families of those who died in the two crashes.

  Boeing executives and executives at several major airlines have said they plan to reach an agreement on compensation for the groundings and for the delays in deliveries. Families of the 346 people killed in the two crashes have filed numerous lawsuits.  Boeing has announced a $100 million compensation fund for families of those killed in the crashes.

 

The 737 Max 8 was grounded in mid-March in the wake of the fatal crashes in Ethiopia and Indonesia. Boeing announced in May that it had finished the development of a software fix to the aircraft and had already flight tested it. The software, known as MCAS, will have to be reviewed by the FAA and air regulators worldwide.

  It's still not clear when the plane will be allowed to return to service, but its CEO told CNBC in June that he believes the plane will be back in the air before the end of 2019.

  "We're committed to providing the FAA and global regulators all the information they need, and to getting it right. We're making clear and steady progress and are confident that the 737 Max with updated MCAS software will be one of the safest airplanes ever to fly," Boeing CEO Dennis Muilenburg said.

  Nearly 400 planes already in airline fleets have been grounded and Boeing has halted deliveries of the 737 Max, although it continues to build them. The company says the aircraft is the fastest-selling aircraft in its history and it has received some 5,000 orders from more than 100 customers around the world.

  Boeing executives and executives at several major airlines have said they plan to reach an agreement on compensation for the groundings and for the delays in deliveries. Details of that compensation are not yet known, although Boeing has taken a $4.9 billion after-tax charge related to potential concessions and other considerations to its customers.

 

Last week, CNN reported that an international panel created after the two accidents was expected to recommend the FAA change the way it certifies planes, as well as address safety concerns that aircraft technology is becoming far more sophisticated than the regulations that govern it.

 

 

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