American Airlines Estimates $1 Billion Hit From 737 MAX Grounding, Rising Fuel Prices

Apr 26, 2019

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On Friday morning, American Airlines announced its 2019 first quarter earnings. Excluding tax and special items, the airline announced $314 million of profit. That may sound like a lot of money, but it’s a 32% drop from the same period in 2018 and only a quarter of what the airline would need to be on pace to hit its stated goal of $5 billion in pretax profit per year.

The situation isn’t getting better anytime soon. As part of its guidance to investors, airline management has warned of a $1 billion potential earnings hit in 2019 from prior guidance due to just two situations: the 737 MAX grounding and rising fuel costs.

The 737 MAX grounding caused the airline to cancel approximately 1,200 flights in the first quarter and around 115 per day during the peak summer travel. The airline had been mum on the financial impact of the grounding so far, but announced Friday that it currently expects it “will impact our 2019 pre-tax earnings by approximately $350 million.”

AA has removed the 737 MAX aircraft from its flight schedule through August 19, already an extension from the original date of April 24 and the secondary date of June 5. During the earnings call, management was questioned on this date and the probability of extension. American CEO Doug Parker noted that this date was based on discussions with the FAA and that the airline needed at least a 95% chance that the 737 MAX would be available by this date.

An analyst pointed out that AA’s 737 MAX earnings hit was larger than Southwest’s despite Southwest having a larger 737 MAX fleet. AA management struggled to reconcile the difference. One explanation was that AA is expecting a lower Revenue per Available Seat Mile (RASM) due to the groundings as it’s having to re-accommodate passengers into seats that were expected to be sold to last-minute business travelers.

Another explanation that wasn’t brought up by the airline’s management is that AA expects to recover the costs of the 737 MAX groundings from Boeing and/or insurance. So, the airline has an incentive to round up on the extent of the impact.

But the bigger financial impact is from what the airline is calling the “recent run-up in oil prices.” Concerns over tightening Iran sanctions and Russian crude oil quality concerns sent the price of oil to a six-month high this week, with the price of Brent crude oil topping $75 per barrel.

While the price has retreated in the past couple of days, the airline is projecting higher-than-expected fuel prices for the remainder of the year. For the full year 2019, AA expects fuel prices “to be approximately $650 million higher than we forecast just three months ago.”

This increased fuel expense may not hit the bottom line as it possibly could be recaptured through higher ticket prices. Delta, for example, boasted in 2018 it was able to recapture around 90% of higher fuel costs through higher fares. However, American Airlines hasn’t historically been as successful at demanding a higher ticket price.

Featured image by Joe Raedle via Getty Images

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