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Will 737 MAX Issues Hurt Q4 Earnings of Airline Majors?

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Following a spate of mergers, majority of the aviation market in the United States is controlled by four carriers — Delta Air Lines (DAL - Free Report) , American Airlines (AAL - Free Report) , Southwest Airlines (LUV - Free Report) and United Airlines (UAL - Free Report) .

Of the four major U.S.-based carriers, Delta has already reported fourth-quarter 2019 results. In fact, this Atlanta, GA-based Zacks Rank #1 (Strong Buy) carrier kick started the fourth-quarter earnings season for the Zacks Airline industry on Jan 14. You can see the complete list of today’s Zacks #1 Rank stocks here.

Delta’s Blow-Out Q4 Results

The carrier reported better-than-expected earnings per share and revenues in the final quarter of 2019. Moreover, both earnings and revenues increased year over year. Results were aided by upbeat air-travel demand from holiday travelers. Passenger revenues, which accounted for 89.6% of the top line, improved 6% mainly on the back of strong demand for air travel.

Strong Passenger Revenue Growth Likely at Other Majors too

While United Airlines will report its fourth-quarter 2019 results on Jan 21, American Airlines and Southwest Airlines will do the same on Jan 23. Given the presence of the Thanksgiving holiday period in the October-December timeframe, passenger revenues are likely to have grown handsomely for all three carriers, which in turn might have boosted their fourth-quarter performance.

Notably, passenger revenues account for the bulk of total revenues for all airline majors. For instance, passenger revenues accounted for 91.7% and 91.9% of the top line at United Airlines and American Airlines, respectively, in the first nine months of 2019. Mainly due to strong demand for air travel, we expect carriers to have performed perform well on the unit revenue front in the December quarter.

Boeing 737 Exposure Might be the Difference

Despite impressive air-travel demand, the factor that might prevent Southwest Airlines, American Airlines and United Airlines from emulating Delta’s blow-out fourth-quarter performance is that the latter does not have Boeing 737 MAX jets in its fleet, unlike the other three.

Southwest Airlines, American Airlines and United Airlines currently have 34,24 and 14 such jets, respectively, in their fleet. Consequently, Delta is immune to the troubles stemming from prolonged groundings.

As a reminder, all U.S.-registered Boeing 737 MAX jets have been grounded since March 2019 after these were involved in two fatal air crashes in different parts of the world over a span of five months, apparently due to software malfunctioning. In fact, the Zacks Airline industry has underperformed the S& P 500 index since the groundings.

 

 

Multiple flight cancellations due the groundings are likely to have hurt the top lines of the carriers in fourth-quarter 2019. United Airlines is likely to have cancelled 5,100 flights in November and December due to the extended grounding issue. Moreover, high non-fuel unit costs due to lower capacity are likely to have hurt the bottom line. Evidently, at Southwest Airlines, non-fuel unit costs are estimated to have increased 4-6% year over year in the fourth quarter of 2019.

American Airlines expects 2019 pre-tax income to have been hurt to the tune of $540 million due to these groundings. Even though American Airlines recently inked a deal with the manufacturer of the planes — The Boeing Company (BA - Free Report) — pertaining to compensation for losses due to the grounding of the planes, American Airlines does not expect the agreement to have “any material financial impact” on its fourth-quarter results.

In view of the above evidences, it is very much likely that the woes associated with the grounding of Boeing 737 MAX jets may have dented the fourth-quarter performances of American Airlines, Southwest Airlines and United Airlines. The adversities might have prevented the three airline majors from flying as high as Delta in fourth-quarter 2019.

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