Southwest reaches deal with Boeing over expected 737 MAX damages

Tomas Del Coro (CC BY-SA 2.0)

Southwest Airlines (LUV) says it will share some of the Boeing 737 MAX compensation money with its employees, after the company reached a deal with the U.S. manufacturer to compensate for a portion of the projected financial damages related to the grounding of the jet.

Southwest said on December 12, 2019, it recently reached a confidential agreement with Boeing to compensate for a portion of the estimated $830 million hit to the company’s operating income in 2019 arising from the grounding of the airline’s 737 MAX aircraft in March 2019. The airline plans to add $125 million to the profit sharing pool.

“In light of this agreement, the Southwest Board of Directors has authorized a discretionary, incremental profit sharing accrual for Employees, which is tied to the projected reduction in operating income for annual 2019 due to the MAX groundings,” the official statement from Southwest reads. “The Company currently estimates this incremental profit sharing accrual to be approximately $125 million.”

According to Southwest, the award will be funded as part of the company’s annual 2019 profit sharing distribution in 2020. The profit sharing details should be provided early next year, including the percentage each eligible Southwest employee will receive.

“On behalf of the Southwest Board of Directors, we are grateful to our Employees for their extraordinary efforts throughout the year and are pleased to share proceeds from our recent agreement with Boeing,” Southwest CEO Gary C. Kelly stated.

Discussions between Southwest, the world’s largest 737 MAX operator, and Boeing regarding compensation for damages related to the groundings continue. However, the details of these talks, as well as the settlement with the U.S. plane maker, are confidential.

“While still evaluating the applicable accounting principles, the Company currently expects to account for substantially all of the compensation as a reduction in cost basis of both existing and future firm aircraft orders, which will reduce depreciation expense in future years,” Southwest’s statement reads.

Southwest hit hard

The Dallas-based carrier has been one of the most hit by the MAX crisis: the world’s largest low-cost carrier operates an all-Boeing 737 fleet, consisting of the 737-700, 737-800 and 737 MAX 8. Southwest currently has 34 of the grounded jets in its fleet of about 752 aircraft and, based on Boeing’s customer log, still has up to 250 MAX 8s on order.

According to Southwest’s financial statements, the grounding of the MAX reduced operating income an estimated $175 million in the second quarter, alone. The company’s latest earnings release revealed a reduction of operating income by an estimated $210 million in the third quarter due to the MAX crisis.

Overall, the company’s 2019 year to date operating income for the nine months ended September 30, 2019, was negatively impacted by $435 million “and we expect the damages to continue to grow into 2020,” the airline stated. How much of a blow Southwest will have suffered will be known at the end of January 2020, when the company releases its Q4 2019 financial results.

What’s next for Southwest

With the astounding revelations made before the U.S. Congress on December 11, 2019, the Federal Aviation Administration (FAA) chief Steve Dickson made it clear that the Boeing 737 MAX will not be ungrounded before the end of 2019, as the manufacturer had previously hoped.

The following day, on December 12, 2019, American Airlines (A1G) (AAL) released an update announcing it is pulling 737 MAX flights from schedule through April 7, 2020. Southwest, American and United Airlines had previously scheduled flights without the use of the jet until early March 2020, but will now likely follow American’s lead and push back the date once again.

American and United Airlines also remain in discussions with Boeing about compensation for financial damages. American currently has 24 MAX planes in its massive fleet and had expected another 40 out of total 76 jets ordered to be delivered by the end of 2019. Southwest expected 41 MAX jets to be delivered in 2019 – a schedule that will now shift into 2020.

Despite the turmoil and the financial impact, Southwest says it “remains confident that, once certified by the FAA, the enhancements will support a safe return of the 737 MAX aircraft.

Meanwhile, in a statement about the aforementioned compensation settlement with Boeing, the Southwest Airlines Pilots Association (SWAPA) said the agreement “doesn’t get anywhere close to compensating” the losses its pilots and other employees have experienced, Reuters reports.

The union had filed a lawsuit against Boeing in October 2019, for “deliberately misleading the organization and its pilots” about the 737 MAX. SWAPA alleged the grounding of the plane has caused its pilots over $100 million in lost wages.

In a more harshly-worded statement, released on December 13, 2019, SWAPA’s President Jon Weaks said this: “Boeing will never, and should not ever, be given the benefit of the doubt again. The combination of arrogance, ignorance, and greed should and will haunt Boeing for eternity. I strongly concur with Southwest exploring obtaining a different and perhaps non-Boeing aircraft for the best interest of all our futures.”


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