Max squeeze? Grounded jets ding Southwest's stock price and could mean higher fares – PostBulletin.com

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In the past two months, Southwest Airlines’ stock price has fallen over 9 percent.

That’s worse than the airline industry as a whole, and it’s one metric that reflects the costs of Southwest’s recent disruptions. First, it was bad weather, then a labor fight and, still underway, the grounding of the 737 Max aircraft.

Southwest, whose stock trades as LUV, has canceled thousands of flights since mid-February. It stranded passengers across the country, took a hit on social media and sued its mechanics union to keep planes in service.

Last week, Southwest moved proactively to suspend the Max from its schedule for another two months, until Aug. 5. While the move is aimed at reducing the number of last-minute cancellations during summer travel, all the Southwest news has shaken Wall Street.

“We can’t recall a time where LUV has struggled so mightily in a period of relative macro stability,” wrote analyst Hunter Keay of Wolfe Research.

The disruptions are prompting Southwest to cut growth plans, which will trickle down to some loyal customers as well as investors.

Southwest had planned to increase capacity by 3.5 percent to 4 percent in the first quarter. In late March, as concerns about the Max continued, Southwest scaled back its growth forecast to about 1 percent.

That would be the slowest year-over-year growth for a quarter since 2014. And analysts are projecting a similar growth rate for Southwest for this summer.

The Max has been grounded in the U.S. since March 13, following a second fatal crash in Ethiopia. On Sunday, American Airlines said it also would remove the Max from its schedule for longer, suspending the aircraft until Aug. 19. On Monday, United Continental suspended Max flights until early July.

Southwest and American have 34 and 24 Max aircraft in their fleets, respectively. United has 14.

Together, Southwest and American said they expect to cancel about 275 summer flights a day because of the Max. That’s over 40,000 seats, which is still a small fraction of total passengers — about 1.5 percent of American’s daily flying in the summer, the airline said.

But supply and demand help drive fares, and that equilibrium will be disturbed, said Rick Seaney, CEO of FareCompare, a Plano-based website that tracks fares.

“When all is said and done, ticket prices will be up just because there are fewer seats,” Seaney said on Monday. “Summer is the peak season, thanks to leisure travelers, and most flights will be full.”

In the aggregate, he projects that the average fare increase will be small, but the impact will vary by location. Routes from smaller cities will face higher increases because carriers have less competition, he said.

“Don’t expect Dallas-to-L.A. prices to go up very much,” Seaney said. “There are too many competitors.”

Hopper, another air travel booking site, hasn’t seen an impact on demand yet — and said it doesn’t expect a significant increase in prices.

The Max accounts for a small share of seats and airlines have offset the negative effects of the grounding by adjusting timetables and maintenance schedules, said Patrick Surry, Hopper’s chief data scientist. As a result, he expects summer travel costs to be driven by larger economic forces, such as the price of oil and competition with low-cost carriers.

Perhaps the greatest threat from the Max is that some passengers will get nervous about flying and delay travel.

“We have not seen a measurable impact to this point yet, but we see anecdotal evidence that travelers are asking about it,” Surry wrote in an email.

The grounding of the Max fleet is likely to lower domestic capacity by 1 to 1.5 percentage points while a fix is being developed, said analyst Savanthi Syth of Raymond James. And that “could bode well for domestic industry fares primarily in the off-peak periods,” she wrote last week.

In her report, she lowered her recommendation on Southwest’s stock price — a rarity because Southwest has outperformed its peers over longer periods. But Boeing Co. has not indicated when the Max may be cleared to fly, and she cited that uncertainty in the downgrade.

“We are not negative on LUV shares,” Syth wrote, adding that she remained confident about Southwest’s superior margins, cash flow and international growth opportunities.

Keay of Wolfe Research said Southwest was “acting nimbly” to cover for lost flying. Southwest has backfilled service in 166 Max markets, he said. And in 79 markets with less capacity, Southwest’s flights are declining by just 0.7 a day, to 8.7 daily — “still a hefty schedule,” he wrote.

It would be naive, Keay said, for investors to believe that rivals could swoop in and grab some Southwest business. The airline “is simply too strong in the markets it serves,” he wrote.

That may offer some comfort to Southwest customers, especially with Southwest being the country’s largest domestic airline.

Seaney said travelers still have plenty of available seats for the summer, even if capacity growth will be lower than projected. But it’s not smart to wait too long.

“If you plan to travel this summer, you need to be shopping right now,” Seaney said. “Prices are not gonna get cheaper as we get deeper into the summer.”

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