Southwest Keeps It Going Despite the 737 Max Fiasco

Given how long it is taking for Boeing (BA 0.53%) to resolve the issues that caused a pair of 737 Max jets to crash last year, it would be no surprise if Southwest Airlines (LUV -0.98%) was feeling the pinch. Those planes make up more of its fleet than they do for any other U.S. airline. But in fact, Southwest is outperforming expectations. In this segment of the Oct. 25 Motley Fool Money podcast, host Chris Hill and analysts Emily Flippen and Ron Gross chat about what's happening at the airline, its plans, the potential longer-term impact of the Max's woes on the aerospace sector, and more.

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This video was recorded on Oct. 25, 2019.

Chris Hill: Third quarter profits for Southwest Airlines came in higher than expected. Emily, Southwest getting it done despite the fact that it is the largest operator in the U.S. Boeing's 737 Max, and those grounded planes cost them more than $200 million in revenue this quarter.

Emily Flippen: Not only are they the largest operator of Boeing 737s in the world, but they're a launch customer for Boeing 737 Max. So Southwest has definitely been hit the hardest out of all the airlines given this fiasco we're seeing with the 737 Max. But despite all of this, and despite having to cancel all of their Max flights through January 2020, they actually had a pretty great quarter. Costs were up thanks to that grounding, but fuel costs were lower than expected, and more importantly, their revenue per available seat -- the RASM -- was up 4% quarter over quarter.

Ron Gross: [laughs] RASM, I love that!

Hill: Gary Kelly, the CEO at Southwest, he just came out and said in an interview this week he is not happy with what's happening at Boeing. You mentioned the fact that this is going to continue at least until January of 2020. Then, once the 737 Max planes are cleared, it's still going to take a couple of months to get all of the pilots and crews trained up on them. Are we going to be sitting here six months from now talking about this issue continuing for Boeing? If we are, I'm starting to believe that for all the talk that we've had of, "It's really hard to switch planes," with every passing quarter like this, Airbus gets closer and closer to supplying planes for businesses like Southwest.

Flippen: Let's not forget that there's some political reasons why Boeing is better positioned in the U.S., at least with U.S. operators vs. Airbus. A lot of those geopolitical concerns, Airbus having a lawsuit recently against Boeing because of the fact that both the E.U. and the U.S. were illegally subsidizing both Airbus and Boeing. That competition has been fueled for a while. 

I think Gary Kelly is more upset because it's derailed what is Southwest's growth strategy. Before all this happened, we saw Southwest making aggressive expansion plays, moving into areas like Hawaii, spending a lot of money to expand their fleet, to expand their areas of service. After this, they're canceling flights. They've canceled Newark recently as a location that they're going to be flying to. So, it almost feels like they've been stifled by this. Meanwhile, Delta is coming out and they're expanding to Latin America. They have no Boeing 737 Max planes in their fleet at all. So, I wonder if the concern is really just the fact that Gary Kelly's over here like, "Gosh, I laid this great plan, and then Boeing's going to come along and ruin it for me!"

Gross: Does Southwest have recourse in terms of a lawsuit for Boeing, or business interruption insurance? Are they going to recapture some of this?

Flippen: Yes. It's likely that Boeing will have to pay something to Southwest. We don't know what, but it's likely that they'll see some windfall from this.