Consumers could see higher fares because of Boeing 737 woes

  • Experts think consumers could see higher fares going into the holiday season because of Boeing’s worldwide grounding of its 737 Max plane.
  • Southwest won’t fly the Max until 2020 and will shut its Newark route, while American Airlines also took a second-quarter hit to profit from the grounding.
  • Boeing is the U.S.’s biggest exporter, and the Max’s grounding cut U.S. GDP by 0.25% in the second quarter, some economists estimate

The Boeing 737 Max, grounded worldwide since March following two deadly crashes, is weighing on the U.S. economy as suppliers, airlines and even consumers wait for global regulators to clear the plane as safe to fly.

The Federal Aviation Administration is under fire for reportedly lax oversight of the Max’s development by leaving most testing of a problematic software system to the company itself.  Here’s a look at the situation so far and potential consequences if the plane isn’t cleared in time for the holiday season.

If regulators don’t allow the Max to fly by year-end, Boeing CEO Dennis Muilenburg has said his company could be forced to temporarily halt production at its Renton, Washington, plant, something that surprised some analysts and investors. The company already cut production of the aircraft in April.

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Muilenburg made the comments last week while relaying the planemaker’s worst quarterly results ever to Wall Street. Still, he repeated that the company’s best estimate of when regulators will clear the Max to return to service is in early in the fourth quarter. That’s before the busy holiday travel season, a key period for airlines. 

Southwest won’t fly the Max till 2020

Southwest, Boeing’s biggest U.S. customer for the Max, was counting on the latest version of the plane to boost capacity by 5% this year. The carrier now expects its “available seat miles” — a standard measure of a plane’s carrying capacity — to drop between 1% and 2%. That means Southwest has to cut costs.

Southwest last week removed the Max from flight schedules through Jan. 5, becoming the first U.S. airline to drop the plane for the rest of the year. To save money, it’s also ending service to Newark Libert International Airport in New Jersey. 

“It’s really all about the Max,” Southwest CEO Gary Kelly told Wall Street analysts and investors on its earnings conference call last week.

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American Airlines is counting on the Max returning to service this fall. For now, the carrier has scratched Max flights through Nov. 2. The company recently forecast that the Max’s grounding will cut into pretax profit this year by about $400 million.

“‘We really don’t have any new information that leads us to make changes,” President Robert Isom said in a conference call with analysts. 

Boeing needs to present regulators with a fix to the Max’s problems “pretty quickly.” or there could be possible flight and job cuts, Ryanair CEO Michael O’Leary said on a call with analysts Monday, according to a transcript.

“Look, I mean, the situation that we are today, we were originally expecting 58 aircraft for the summer of 2020, that’s now 30 at best. It may well move to 20, it could move to 10, and it could well move to [zero] if Boeing don’t get their (expletive) together pretty quickly with the regulators,” O’Leary said on the call.

Spirit AeroSystems, Boeing’s biggest supplier and maker of 737 parts including the fuselage, in May suspended its financial forecasts because of the grounding. Spirit also put some 6,000 workers on a four-day work week, the Wichita Eagle reported.

Other suppliers are also taking a hit. GE’s joint venture with Safran of France makes the only engine available for the Max. In April, the company said delays would cost each partner at least $200 million, according to a transcript. GE reports its second quarter results this week.

Consumers could pay more

So far, airlines mostly have been able to move their capacity around to meet consumer demand. But come the holiday season, and starting with Thanksgiving, tickets could get pricier if the Max is still grounded, industry watchers said.

Some budget airlines, like Frontier and Spirit, didn’t order the Max and will offer “plenty of competition” to airlines like Southwest that are taking hits from the Max’s grounding, Henry Harteveldt of travel-industry consulting firm Atmosphere Research Group told CBS MoneyWatch.

At airlines with the Max already in their fleets or that had planned on having the plane in their fleets this year, “There will be fewer seats available at the very lowest fares,” Harteveldt said.

That’s because unlike in the summer travel months, end-of-the-year holiday demand tends to be from large hub airports to smaller, local airports, said Hayley Berg, an economist at the travel website Hopper. 

“It’s possible that travelers planning trips at Thanksgiving and Christmas will have more difficulty finding a great deal on flights home for the holidays if there is less capacity and less carrier competition on their particular route,” Berg told CBS MoneyWatch in an email. 

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Boeing is the U.S.’s biggest exporter, and the Max grounding cut into annual economic growth in the second quarter by 0.25%, Michael Pearce of Capital Economics said in a research note this week. 

If Boeing cuts production further, “a similar hit to third quarter GDP is likely,” he wrote. Once the Max returns to the air and Boeing can resume shipping, that could provide a lift to GDP, however.

But it could take some time for as passengers to get comfortable with flying on the aircraft, according to a survey from Atmosphere of about 2,000 airline passengers over 18 years old taken at the end of April. Just 14% of those surveyed said they would definitely fly on a Max inside six months of its return to service, while 1 in 5 surveyed said they would fly in the first year.

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