The lasting impacts of Boeing 737 groundings on airlines
The airline industry is facing continued turbulence from the mid-air incident involving a Boeing 737 Max 9 plane (BA) during an Alaska Air flight (ALK). The line of particular jets is still grounded as the FAA and Alaska Air continue their investigations, hundreds of flights have been canceled, and United Airlines (UAL) claims this will cause a hit to its earnings.
Steve Trent, Citi Managing Director and Equity Analyst, joins Yahoo Finance to discuss the impacts the incident continues to instill on airlines and how it will affect the sector at large.
"In terms of the bookings, probably that's still way too early to tell when we think about what's been booked close in and the pipeline looks good," Trent explains. "I think in terms of the potential earnings exposure, roughly speaking, kind of rule of thumb, we kind of think about every 1% reduction in available seat mile growth translates into roughly a 2% reduction in pre-tax earnings. So there can be some nuances around that with respect to where we happen to be with jet fuel prices and what have you."
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Editor's note: This article was written by Nicholas Jacobino
Video Transcript
JOSH LIPTON: Airlines hitting some turbulence so far this year, as we've been discussing. United forecasting a first quarter loss due to the grounding of the Boeing 737 Max9 planes. JetBlue's Robin Hayes gearing up to step down as CEO. And meanwhile, Delta Airlines gets more cautious as it trims its 2024 earnings outlook. That's only scratching the surface as investors now await quarterly results from a slew of airlines.
Here to discuss the journey ahead, we have Stephen Trent, Citi Managing Director and Equity Analyst. Stephen, it is always good to see you.
STEPHEN TRENT: Pleasure to see you. And thank you for having me on.
JOSH LIPTON: Maybe we'll start just what we were just discussing. You know, so Boeing's CEO David Calhoun is on Capitol Hill today. He's answering these questions. You know, beyond what it just means for United Alaska, Stephen, maybe just talk to us about what are the ripple effects of this, for the broader industry, for the broader sector.
STEPHEN TRENT: Absolutely. So I think as we look through the next several quarters at least, it's hard to believe that this is going to be the very last thing we hear about supply chain. So we've been through the pandemic, a lot of these companies, not just the OEMs, but the dozens of companies that supply them, it's been tough to find employees. It's been tough to find equipment.
So as we move forward, you know, there's already been issues out there. Of course, you have the door plug in the Max9. You have the fan blade issue on the Garrett turbofan engine. So I think going forward, do the airlines have confidence in the equipment? I would say that's still a generally Yes in terms of the answer. But I think time is going to tell in terms of the extent to which this slows down the train, helps the group grow capacity, and do you get any passenger feedback, negative feedback, from the incidents that we've seen recently? The hope is no, but maybe it's a little early to tell.
JULIE HYMAN: Well, and I guess maybe this question is a little early to ask, but how do you quantify the revenue hit to the airlines from, a, having to ground some of these planes? But also, do we know yet if passengers are saying, I'm not going to book my flight right now while this is going on?
STEPHEN TRENT: Yeah, absolutely. So I think in terms of the bookings, probably that's still way too early to tell. When we think about what's been booked close in, the pipeline looks good. I think in terms of the potential earnings exposure, roughly speaking, kind of rule of thumb, we think about every 1% reduction in available seat mile growth translates into roughly a 2% reduction in pre-tax earnings. So there can be some nuances around that with respect to where we happen to be with jet fuel prices and what have you.
Then the other layer on top of that eventually is, what kind of compensation, if any, do the airlines get for these problems? Are they-- are they going to get some cost reimbursed? That's possible. Are they going to get reimbursed for the revenue spill from all this capacity taken out? That's possibly a taller order.
