Southwest Posts Earnings Beat but Warns of Rising MAX Costs

Southwest says the extended grounding of the Boeing 737 MAX will dent growth through the first half of 2020.

Southwest Airlines  (LUV) - Get Report on Thursday reported fourth-quarter adjusted earnings that beat analysts' forecasts even as it took a charge related to the ongoing grounding of its fleet of Boeing-made 737 MAX aircraft. 

The airline warned also said future costs are rising because of the jet's grounding.

The Dallas-based airline said it earned $514 million, or 98 cents a share, in the fourth quarter ended Dec. 31, vs. $654 million, or $1.14 a share, in the comparable year-earlier quarter. 

The results excluded a charge of $97 million, or 18 cents a share, related to profit-sharing and Boeing-related compensation. Including that amount, the company would have earned $1.16 a share, above analysts' forecasts of $1.09 a share.

However, the airline warned that it expects a closely watched gauge of costs to climb in the current quarter as the cost to fly each seat a mile rises by between 6% and 8% because of the MAX's absence from its fleet.

Southwest has the most Boeing 737 MAX planes in its fleet and on order than any other U.S. airline. The planes have been grounded since March 2019 after two fatal crashes - one in Indonesia in October 2018 and another in Ethiopia less than five months later - killed 346 people.

During the fourth quarter, Southwest reached an agreement with Boeing on compensation related to estimated 2019 financial damages due to the Federal Aviation Administration's March 2019 order to ground the 737 MAX.

However, the financial impact from the grounding isn’t yet over, the carrier warned, noting that based on its MAX-related flight schedule adjustments through June 6, it currently expects first-quarter year-over-year capacity to drop in the range of 1.5% to 2.5%.

In the interim, fourth-quarter operating revenue increased 0.4% year over year to a fourth-quarter record of $5.7 billion, matching forecasts, on a 0.9% drop in available seat miles due to the MAX groundings. Fourth-quarter operating revenue per ASM increased 1.3% year over year.

The estimated operating income reductions from the MAX groundings for fourth quarter and for 2019 were $313 million and $828 million, respectively, Southwest said.

Net income in 2019 was $2.3 billion, or $4.27 a share, compared with 2018 earnings of $2.5 billion, or $4.29 a share.

Shares of Southwest were up 0.88% at $53.95 in morning trading.