Despite the grounding of the Boeing (BA -1.10%) 737 MAX, which caused more than 10,000 flight cancellations in the first quarter, Southwest reported its best revenue growth rate in 18 consecutive quarters toward the end of April. But the encouraging performance on the top line wasn't enough to offset concerns about the near-term impact on profitability stemming from the grounding of the 737 MAX.
In early May, one analyst downgraded Boeing stock citing a survey that revealed that many passengers may avoid flying on the 737 MAX for at least a year. Within the last year, there have been two crashes involving the MAX caused by a software glitch in the plane's flight control system. The analyst report, on top of other negative news surrounding the trade war with China and Mexico, sent airline stocks down for the month.
Southwest reported record operating revenue in the first quarter of $5.1 billion, but management said flight cancellations took their toll on operating costs. In the short term, the company expects the MAX groundings to drive unit cost pressure until the aircraft is approved for flying again.
One way or another, Southwest will get back to normal performance at some point. Management said if it hadn't been for the flight cancellations, the first quarter would have been a "blowout." Southwest generated $945 million of free cash flow and returned $678 million to shareholders through share repurchases and dividends.
The last five years have been a good run for the airline industry, especially for the leader Southwest, which has seen its net profit margin roughly double. Southwest is focused on continuing to maintain a strong balance sheet and implement cost-saving initiatives to keep margins improving. Management is also focused on growth with the new service to Hawaii, which commenced in March.
Even with the flight cancellations, analysts currently expect Southwest to grow revenue and earnings by 5.1% and 6.6%, respectively, in 2019.