Southwest Airlines expects lower unit revenue growth in the first quarter, as unscheduled maintenance disruptions and the Boeing 737 Max grounding contribute to an estimated $150 million in lost revenue for the period.
The Dallas-based carrier is also expecting higher costs in the first quarter as it reaches an agreement in principle with its mechanics union that will result in $42 million of additional salary expense for 2019.
The $150 million of lost revenue is in addition to the $60 million of negative revenue impact that the airline had earlier estimated from the government shutdown which ended in late January. Weather disruptions and softness in leisure passenger travel demand and yields also contributed to the $150 million in lost revenue, says the airline.
Southwest now expects its first quarter unit revenue to grow in the 2-3% range, instead of 3-4% as earlier forecasted.
“This reduction to the company’s previous year-over-year RASM guidance is largely due to lost passenger revenue as a result of flight cancellations from the unscheduled maintenance disruptions, as well as further softness in leisure-oriented passenger demand and yields,” says Southwest.
Prior to the US grounding of the 737 Max on 13 March, Southwest was struggling with unscheduled flight disruptions related to ongoing contract negotiations with its mechanics union which had dragged on for six years.
The airline says it expects cancellations of about 9,400 flights from mid-February through 31 March. Of these flights, about 3,800 are weather-related cancellations while another 2,800 are attributed to the unscheduled maintenance disruptions. Another 2,800 flights are being disrupted due to the grounding of the airline’s 34 737 Max 8s.
Southwest has reduced its flight schedule through 20 April and is studying further reductions. “Due to the current uncertainty regarding the duration of the Max groundings and any requirements for reinstatement of the aircraft into service, it is difficult for the company to forecast the impact of the Max groundings beyond first quarter 2019,” it adds.
Capacity in the first quarter is now estimated to grow only 1%, down from 3.5% to 4% previously.
The reduced schedules have pushed upwards the airline’s unit cost estimates for the first quarter. Unit cost excluding fuel and profitsharing is now expected to grow 10%, up from 6% previously.
The flight cancellations in the first quarter are contributing a three-point year-over-year increase to unit cost excluding fuel and profitsharing. The new agreement in principle with Southwest’s mechanics union will lead to $30 million of additional costs in salaries, wages and benefits for the first quarter alone, and $42 million of additional costs for 2019.
Southwest says the agreement with the Aircraft Mechanics Fraternal Association provides for 3% in retroactive pay back to the contract amendable date, a 20% snap-up rate on 1 April and a 3% annual wage increase for the duration of the five-year contract.
Despite the worsening guidance for the first quarter, Southwest says it is “encouraged by the continued strength in year-over-year close-in yields in first quarter 2019”. The airline is also expecting a strong unit revenue year-over-year performance in the second quarter, based on current revenue trends.