Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Delayed Deliveries Lead to Revenue Shortfalls
The ongoing grounding of the Boeing 737 Max fleet is hitting United Airlines right in the wallet. The airline was expecting big things from the fuel-efficient Max planes and had ordered dozens of the jets to modernize its fleet. But with the new aircraft grounded indefinitely in the wake of two deadly crashes, United is scrambling to deal with both delayed deliveries and lower revenues.
According to United's recent first quarter financial guidance, the airline is projecting capacity to fall by 6% compared to the same period last year due to the parked Max planes. That capacity reduction is leading to an estimated $150 million hit to United's pre-tax income for Q1 alone. When an airline suddenly loses a chunk of its fleet with no backup plan, there are going to be consequences.
See, airlines plan their schedules far in advance and optimize things like crew staffing and aircraft deployment to maximize efficiencies. Suddenly losing access to 14 Max aircraft has thrown United's planning into disarray. The airline has been forced to cancel over 1,600 Mainline flights so far in the first quarter, with total cancellations projected to reach 8,000 by the end of March.
All those cancelled flights mean lost ticket sales. Fewer flights going out means fewer seats to sell. And if a route gets cancelled altogether, that's a big revenue stream shut off completely. United CEO Oscar Munoz has stated the Max grounding will cost the airline around $430 million in pre-tax income just through Q1. That loss includes both the cost of parked aircraft and the loss of expected revenues.
It's not just United feeling the sting. Southwest Airlines was counting on the fuel-efficient Max to provide cost savings while expanding its route network. But with its 34 Max planes grounded, Southwest has had to cancel 9,400 flights already. The airline is projecting $150 million in Q1 revenue losses due to reduced flying.
What else is in this post?
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Delayed Deliveries Lead to Revenue Shortfalls
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Scrambles to Meet Demand Without Max Fleet
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Company Projects Q1 Capacity Will Fall 6% Year-Over-Year
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Taking Aircraft Out of Storage to Fill Schedule Gaps
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Max Sitting Idle Costs United $430 Million So Far
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Working With Boeing On Compensation Deal
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Airline Industry Impacted By Ongoing Max Grounding
- Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Working to Minimize Disruptions for Travelers
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Scrambles to Meet Demand Without Max Fleet
With dozens of new 737 Max jets supposed to be arriving in its fleet, United Airlines spent months optimizing its schedules and planning new routes that would be enabled by the added capacity. But with the Max grounded until further notice, the airline has been sent scrambling to meet customer demand without those expected planes.
According to United's CEO Oscar Munoz, the airline has had to cut its overall Mainline capacity by 6% compared to what was originally planned for Q1 2019. To mitigate the loss of the Max planes, United has rushed to unpark stored aircraft and acquire short-term leases for additional jets. But these stopgap measures can't fully make up for the missing fleet.
United has been forced to cancel over 1,600 Mainline flights already in Q1, with total cancellations estimated to hit 8,000 by the end of March. For an airline that prides itself on operational reliability, that level of cancellations is highly disruptive.
When routes get cut, customers booked on those flights need reaccommodating. That strains the airline's customer service resources. United is having to bump customers onto other flights, which can lead to overbooking issues if empty seats are scarce.
For routes where flights get reduced but not eliminated, the airline struggles with how to handle customers left ticketless due to lower capacity. Telling loyal customers "sorry, we don't have a seat for you" is not an ideal business practice.
The airline also has to wrestle with disruptions to operational staff like pilots, flight attendants and mechanics. These groups are scheduled around planned aircraft rotations that are no longer possible without the 737 Max planes. Pilots rated on the Max can't just be swapped onto other aircraft at a moment's notice.
On top of customer and staff disruptions, United now faces a maze of complex scheduling challenges. With fewer planes to go around, the airline has to decide which routes to cut, which to reduce, and which to maintain full service on. There is immense pressure to make the right tactical moves that minimize revenue losses.
The Max grounding also limits United's ability to launch new routes and expand service. The airline counted on increased capacity from the Max order to grow its network reach. But now, route planners are stuck in limbo, unable to commit to new routes without knowing when the Max fleet will return to service.
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Company Projects Q1 Capacity Will Fall 6% Year-Over-Year
United Airlines has been dealt a serious blow by the ongoing 737 Max grounding. The airline was banking on dozens of fuel-efficient Max jets joining its fleet to lower operating costs and expand route networks. But with the new planes sitting idle indefinitely, United now faces a 6% reduction in overall capacity for the first quarter of 2019 compared to last year.
That 6% figure represents a huge amount of flying. With over 4,500 daily departures, United has massive global connectivity. A 6% cut means over 270 fewer daily flights compared to Q1 2018. For an airline obsessed with maintaining its extensive network reach, that kind of reduction is deeply painful.
Fewer flights mean fewer seats to sell to revenue-generating passengers. United President Scott Kirby put the revenue loss from cancelled Max flights at $150 million for Q1 alone. That hits the bottom line hard. And with the busy summer travel season looming, United fears the Max grounding could clip up to 1% off total 2019 RPMs (revenue passenger miles).
The capacity reductions have broader impacts too. When routes get cut, customers have fewer flight options to choose from. Major business markets may see reduced connections. Leisure travelers could find their vacation destinations slashed. Communities that depend on United for economic links will suffer.
United's pilots feel the crunch as well. Thousands were slated to begin Max training this year. But with the fleet grounded, their work schedules had to be shuffled. Reduced flying means less overtime pay opportunities. Morale takes a hit when expected career progress stalls.
The Max crisis also risks United's momentum in key financial metrics. The airline was on a roll in 2018, posting impressive gains in revenue per available seat mile (RASM), cost per available seat mile (CASM), and other vital figures. The capacity crunch from the Max grounding jeopardizes those gains. Stock market investors have reacted negatively as well.
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Taking Aircraft Out of Storage to Fill Schedule Gaps
With dozens of new 737 Max jets grounded indefinitely, United Airlines has scrambled to patch the sudden holes torn in its flight schedule. To provide customers with options despite reduced capacity, the airline has rushed some unexpected aircraft back into service.
According to United's CEO Oscar Munoz, the airline has brought several dozen planes out of storage to help offset the loss of the Max fleet. These unplanned reactivations include a mix of older 737-900s, 777-200s, and 767s. While less fuel efficient than the new Max planes, these aging jets can still adequately serve existing routes.
Returning parked planes to flight is an arduous process, however. Aircraft fresh from long-term storage require hundreds of maintenance hours before being declared airworthy again. United's mechanics have been working around the clock to get the recalled jets ready to meet the hectic summer schedule. This unplanned maintenance takes resources away from routine upkeep on other fleet types.
Once mechanical issues are resolved, revived planes must get repainted in United livery and outfitted with proper cabin interiors. Flight crews need refresher training as well to get reacquainted with aircraft they haven't flown for a while. It takes weeks to return a stored plane to revenue service - precious time in a crunch.
While stopgap, returning stored jets to service lets United regain some lost capacity. Added flights give customers more options and minimize disruptions. And every little bit helps the airline's bottom line.
But the aging recalled aircraft can't fully replace the lost Max fleet. They lack range and efficiency of the new jets. United's flight schedulers have strained to assign the patchwork fleet in a way that reduces cancellation impacts. But complexity has increased exponentially.
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Max Sitting Idle Costs United $430 Million So Far
The ongoing grounding of Boeing's 737 Max fleet continues to deliver blow after financial blow to United Airlines' bottom line. According to United's management, the airline is estimating a staggering $430 million loss in pre-tax income that can be directly attributed to the Max crisis. For an airline that prides itself on shrewd financial management, hemorrhaging over $400 million is an absolute gut punch.
This massive hit stems from two overlapping factors - the expense of parked jets sitting idle on the tarmac and the opportunity cost of lost revenue from cancelled Max flights. On the cost side, United still has to maintain its grounded Max planes even if they never leave the ground. The airline has to protect the jets against corrosion, keep them properly serviced and inspected, retain aircraft registrations, and more. Parking fees also quickly add up when over a dozen jets get benched at airports across the country.
But the biggest component of United's $430 million loss is all the revenue that never materialized from cancelled flights. With its Max fleet grounded until further notice, the airline has been forced to cancel over 1,600 Mainline flights so far in Q1 2019. By the end of March, total cancellations linked to the Max crisis are projected to reach around 8,000. Each cancelled flight represents lost revenue from ticket sales United was banking on.
Fewer tickets sold means fewer dollars falling to the bottom line. With a constant eye on profit margins, United watches every source of passenger revenue. When whole chunks of capacity get removed from the schedule due to grounded aircraft, that directly impacts total ticket sale revenues. According to United's management projections, that lost revenue will clip $150 million from United's Q1 pre-tax income.
Shareholders and industry analysts have winced at the cascading effects of the Max groundings on United's financials. Operating revenues, passenger revenues per available seat mile (PRASM), and revenue per passenger mile (Yield) are all trending lower. Meanwhile, costs are trending higher as the airline struggles to manage the capacity void. That combination spells earnings pressures until United can get its Max fleet back in the air generating revenues again.
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Working With Boeing On Compensation Deal
While United grapples with ongoing losses from the Max grounding, the airline is simultaneously negotiating with Boeing for compensation. According to United’s President Scott Kirby, the company is in active talks with Boeing regarding remuneration to offset United’s mounting crisis-related costs.
Securing a favorable deal with the aircraft manufacturer is critical for United’s financial health. The airline wants Boeing to cover not just direct costs like stored aircraft maintenance and parking fees, but also to reimburse lost revenues from cancelled flights. Analysts estimate United has lost $430 million and counting, so compensation from Boeing could provide a lifeline.
However, hammering out an acceptable agreement presents challenges. Boeing faces claims from scores of global airlines impacted by the Max grounding. The company will surely resist opening its entire checkbook for United alone. But United has legal leverage, given the manufacturer’s contractual obligations for timely aircraft delivery.
Astute negotiators, United’s leadership seems poised to secure a reasonable payout. The team has experience extracting concessions from partners, as seen in tough renegotiations with key regional providers. The airline knows its lost revenue projections provide a strong factual basis for demanding substantial compensation.
Yet Boeing has its own pressure points to counter United’s stance. The manufacturer can cite regulatory uncertainty, since global agencies control when the Max flies again. Boeing can also leverage its power as United’s main aircraft supplier, cautioning that demands deemed excessive could jeopardize future fleet deals.
The talks remain fluid, but United appears committed to reaching an accord. Getting compensation lets the airline claw back lost income and placate shareholders frustrated by the Max crisis. Securing a sizable payout from Boeing also dodges difficult decisions like passing losses onto consumers through higher fares.
For Boeing, compensation lets the company show commitment to supporting impacted customers. Paying United for losses may strengthen the partnership and prevent defection to rival manufacturers. Any payouts can get baked into adjustments to the total Max production costs as well.
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - Airline Industry Impacted By Ongoing Max Grounding
The ripple effects of the prolonged Boeing 737 Max grounding continue to impact airlines far and wide. This aircraft was expected to become the global workhorse of narrowbody fleets, with over 5,000 orders placed by more than 100 operators. But with the Max indefinitely parked, those airlines must grapple with holes torn in their flight schedules, fleet plans, and bottom lines.
Southwest Airlines finds itself in crisis mode, with more Max planes grounded than any other carrier. The airline rushed to seal a short-term lease deal with United to borrow 38 jets, just to ensure it maintains sufficient capacity. But even creative measures haven't prevented thousands of flight cancellations. Southwest's CEO Gary Kelly stated the Max grounding clipped $828 million from the airline's revenues in 2019 alone.
American Airlines also relied heavily on the Max to replace its aging McDonnell Douglas MD-80 series jets. But with 24 Max planes sitting idle, American has resorted to delaying retirements of the fuel-guzzling MD-80s. Meanwhile, hundreds of pilot training slots originally slated for the Max have sat vacant, slowing career progression.
Over in Europe, Ryanair counts itself among the Max's biggest future customers, with 210 planes on order. But with deliveries halted, the fast-growing airline has had to curtail expansion plans. Ryanair will close several bases completely, while trimming capacity at others. Hundreds of jobs face cuts as well.
For Air Canada, the airline sector's early adopter of the Max, the fallout has been severe. The company's CEO stated they've had to sacrifice both market share and pricing power without their 24 grounded jets. Only creative scheduling has prevented large scale cancellations.
The Max crisis hasn't spared Asia's giants either. China Southern, which already had 14 Max jets in service, has rejiggered schedules by reactivating grounded Airbus A330s. Load factors have declined though, indicating lost ticket sales. Meanwhile, Air China and Shenzhen Airlines continue paying for new planes that remain in limbo at Boeing's Washington plant, awaiting delivery.
In India, SpiceJet and Jet Airways had bet on the Max to power domestic expansion and compete with dominant rival IndiGo. But with 13 Max jets sitting idle, SpiceJet continues limping along, while Jet Airways shut down completely in April, ending 25 years of flying.
The wide-reaching impacts prove this crisis transcends just Boeing and a single aircraft model. Around the world, airlines adjusted plans and optimized fleets around the Max's expanded capabilities and operating efficiencies. For many, this plane underpinned growth strategies. But now, those plans need complete reworking based on unpredictable Max timing. It's a costly, morale-draining exercise.
Grounded: United Predicts Q1 Losses from Prolonged 737 Max Parking - United Working to Minimize Disruptions for Travelers
For customers whose originally booked flights get cancelled, United immediately reaches out with rebooking options. Agents scour the schedule to find seats on alternate connections that get the passenger to their destination with minimal delays. Compensation like flight vouchers may get offered for significant changes.
When alternate United flights aren’t available, agents look to partner airlines. Thanks to United's membership in Star Alliance and several major codeshare agreements, the airline can often endorse travelers over to alliance carriers like Lufthansa and ANA to maintain the trip.
For busy routes with multiple daily flights, United tries condensing schedules rather than eliminating service altogether. Consolidating departures from say 6 a day down to 3 allows many travelers to still fly the route direct. Others get rebooked onto partner carriers operating concurrent routes.
United also works to preserve loyalty perks for delayed Max travelers. MileagePlus elite members still get priority service, lounge access, and fee waivers even if shifted to partner carriers. Rebooked economy passengers can sometimes score complimentary cabin upgrades to soften the blow.
Flexibility with change fees provides another olive branch to disrupted customers. United issues fee waivers for Max related itinerary changes to reduce barriers. Travelers gain confidence they can adjust on the fly without penalties.
Updating customers becomes a high priority as well. United pushes booking alerts, text notifications, rebooking confirmations, and Max updates across multiple channels. Travelers appreciate staying informed directly by the airline versus hearing news secondhand.
While not all inconveniences get mitigated, United knows visible effort reassures loyal customers sticking through turbulence builds lasting brand equity. People focus less on schedule hiccups if the airline shows authoritative command minimizing ripples. United worked diligently to avoid outright stranding customers, which earns forgiveness for short-term irritations.