Southwest Airlines pushes back 737 Max deliveries amid weak travel outlook

The airline said it is revamping its order book with Boeing to come up with 'a sensible delivery schedule' as travel demand slows

A number of grounded Southwest Airlines Boeing 737 MAX 8 aircraft. The airline is delaying its deliveries from Boeing. Reuters

Southwest Airlines is cutting the number of Boeing 737 Max jets it will take through to December 2021 by more than half as the outlook for travel remains bleak.

Max deliveries from Boeing will total no more than 48 until the end of next year as the Covid-19 pandemic limits demand for flights, Southwest said in a statement Tuesday. More than 120 planes had been expected. Also, the carrier will remove the Max from its schedule until late October of this year, as Boeing works to end a grounding that began in March 2019 after two deadly crashes.

Southwest is revamping its order book with Boeing to come up with “a sensible delivery schedule”, as airlines worldwide contend with the worst crisis in industry history because of the coronavirus outbreak and government travel restrictions. Operating revenue will fall as much as 95 per cent in April and May and revenue trends are too hard to predict after that, Southwest said.

“The US economy has been at a standstill, and the current outlook for [the]  second quarter 2020 indicates no material improvement in air travel trends,” chief executive Gary Kelly said in the statement as Southwest reported first-quarter results. “Trip cancellations remain at unprecedented levels, though they have receded from their peak in March.”

The airline's shares rose 3.4 per cent to $30.10 ahead of regular trading in New York. Southwest has dropped 46 per cent this year, the best performance on a Standard & Poor’s index of major US carriers.

Southwest had been scheduled to receive 123 Max jets from Boeing and aircraft lessors through the end of 2021, chief financial officer Tammy Romo said. Under the reworked delivery schedule, the company this year will take fewer than the 27 jets it had been expecting.

With dramatically fewer customers on planes, flying capacity will decline 60 per cent in April and as much as 70 per cent in May, Southwest said. Load factor, or the proportion of seats filled per plane, will average 6 per cent in April and 5 per cent to 10 per cent in May, the Dallas-based airline said. The average last year was more than 83 per cent.

Cost-cutting efforts and a dramatically reduced flight schedule should lower 2020 operating costs by $2 billion (Dh7.3bn) and capital spending will fall by $1bn, Southwest said. The company has temporarily parked 350 aircraft, or roughly half its fleet. It has also frozen hiring, cut executive salaries and offered workers a mix of voluntary unpaid leave and time off at reduced pay.

Southwest has raised $5.2bn in debt since the start of the year and still has nearly $8bn in unencumbered assets. Daily cash burn during the second quarter is estimated at $30 million to $35m – about half as much as the airline said it had initially expected.

"A lot of people have made summer vacation travel plans and I think some people are anxious to begin to get back to their lives,"

The airline intends to apply for a $2.8bn secured loan with the US Treasury Department, but hasn’t decided whether it will ultimately take the funds. Southwest earlier secured more than $3.2bn – part grant and part loan – in payroll support from the Treasury. The company said it is now “actively pursuing” other options for additional liquidity.

Southwest reported an adjusted loss of 15 cents a share in the first quarter, a narrower shortfall than the 30-cent loss expected by analysts. The carrier had adjusted earnings of 70 cents a year earlier. Sales fell 18 per cent to $4.23bn in the first three months of this year, trailing the $4.52bn average of analyst estimates compiled by Bloomberg.

If stay-at-home restrictions start to be lifted, some improvement in travel demand may begin in June, Mr Kelly said.

“A lot of people have made summer vacation travel plans and I think some people are anxious to begin to get back to their lives,” he said. “Seeing what demand is in July and August is real critical."