On Jan. 21, 2020, Boeing (BA 5.64%) announced a further delay in its anticipated ungrounding of the 737 MAX, stating expectations for mid-2020. The January release was a painful follow-up to a December 2019 announcement in which Boeing said it would suspend 737 MAX production starting in January 2020 as a result of uncertain Federal Aviation Administration and global regulatory authorities' reservice approval.
The news is crippling to Boeing, which had reached production of around 400 MAX planes that it cannot sell despite thousands of pre-orders from airlines across the world. Worst of all is that mid-2020 is simply Boeing's best guess, and that means airlines who expected to be flying dozens of 737 MAX aircraft by now might have fewer planes to respond to the summer travel season this year. Here are the biggest winners and losers from Boeing's announcement, some of which may surprise you.
Winner: Airbus. Loser: Boeing
Boeing is the biggest loser, suffering more than just a revenue hit. The company's rival, Airbus (EADSY 2.96%), had a backlog of 7,471 as of Oct. 31, 2019, versus Boeing's 5,488 backlog as of September 30, 2019. Airbus makes a similar product to Boeing's 737, the Airbus 320, which, like Boeing's 737, makes up the vast majority of production. According to Forecast International, 88% of Airbus' backlog is A220 and A320 ceo/neo family narrow-bodies. 4,406, or 80% of Boeing's backlog, are 737s. For years, Boeing was the undisputed leader in the aircraft business, but that's no longer the case. Although Boeing is about 50% larger than Airbus by market capitalization, its lead has been narrowing.
The MAX delays further encourage airlines to question their fleets of the future. The most notable recent announcement came in December 2019, when United Airlines (UAL 7.54%) ordered 50 new Airbus A321s to replace its Boeing 757-200 planes, which are no longer in production. Boeing's superior engineering and craftsmanship are fleeting arguments in the face of a rival company with a competitive product and newfound pricing power.
Winner: Delta Air Lines
Delta Air Lines (DAL 5.55%), the largest U.S. airline by market capitalization, doesn't have any 737 MAX aircraft in its fleet. This gives Delta a distinct advantage over other airlines who forecasted flights with the 737 MAX. Delta's $7.31 2019 earnings per share (EPS) represented 30% year-over-year (YoY) growth. With a 2020 outlook of $6.75 to $7.75 EPS, Delta's growth is expected to slow, but its earnings, compared with the price, make it a powerhouse value stock.
Winner: Alaska Air Group
Alaska Air Group (ALK 5.06%) doesn't have any 737 MAX planes in its fleet of 166 Boeing 737 aircraft, 72 Airbus A320 family aircraft, 34 Bombardier Q400 aircraft, and 60 Embraer 175 aircraft. In the third quarter of 2019, Alaska was able to grow net income a whopping 48% YoY, far surpassing even Delta's 29% or United's 31% over the same period.
Winner: JetBlue Airways
JetBlue Airways (JBLU 5.77%) will need all the help it can get in 2020. The company's COO, Joanna Geraghty, "expects low-single-digit RASM growth for 2020." RASM, or revenue per available seat mile, is a key revenue metric for airlines. Although in line with guidance, RASM declined 0.9% year over year in Q3 2019 and 2.7% year over year in Q4 2019, as reported on Jan. 23. Fortunately for JetBlue, the company is the only major U.S. airline that doesn't operate Boeing planes in its fleet, meaning JetBlue should have no problem filling its expected 14 Airbus orders for 2020.
Loser: Southwest Airlines
As an exclusive operator of Boeing aircraft and the largest current holder of grounded 737 MAX planes, Southwest Airlines (LUV 4.98%) takes the cake as the greatest loser among airlines. Southwest was originally expecting 113 737s by year-end 2020, a forecast that continues to look all the more unlikely.
On Dec. 17, 2019, Southwest delayed scheduling MAX flights until mid-April before pushing that forecast to June 6, 2020. But Southwest's press release came five days before Boeing's announcement, meaning Southwest will likely be forced to delay scheduling MAX flights until late summer or early fall. Airlines like Southwest have little choice but to remove the MAX from any flight schedules until at least a few months after Boeing's latest estimates, or risk cancellations and jeopardizing customers' loyalty.
Adjusting from April 14 to June 6, Southwest removed 330 weekday flights from its schedule out of a "total peak-day schedule of more than 4,000 daily flights." That being said, Southwest achieved a record third quarter in 2019 despite the MAX delays. Southwest has the lowest net total long-term debt and the lowest price-to-free-cash-flow ratio of the largest six U.S. airlines by market capitalization, a testament to its financial strength. Southwest is doing just about everything in its control to improve the situation, but there's no overstating the negative effects the MAX groundings are having on its earnings, as well as its ability to accurately schedule flights.
Loser: American Airlines
American Airlines (AAL 7.09%) is already facing some serious challenges as the worst-performing major U.S. airline stock over the past five years. American Airlines has more net long-term debt than the other five major U.S. airlines combined. Also concerning is American's debt-to-capital (D/C) ratio, which is the highest of the group and now exceeds 100%, meaning the company is highly leveraged and prone to using debt financing over equity financing. The company currently has 24 MAX planes in its fleet, with plans to order 76 more for a total of 100.
Loser: United Airlines
On Jan. 21, United Airlines reported Q4 2019 earnings. After a slew of analyst questions regarding the MAX and its impact on United's earnings, it was at the very end of the call when Andrew Nocella, executive vice president and chief commercial officer, stated, "We do not anticipate flying the MAX this summer."
The harsh reality that the MAX will likely remain grounded during the peak travel season from June to August will undoubtedly weigh on United's 2020 earnings. United also anticipates that the grounding of the MAX effectively creates "about 1 to 2 points of CASM "ex pressure." CASM, or cost per available seat mile, rose 1% in 2019, but management expects it would have been flat or negative if it weren't for the MAX groundings. If the MAX is grounded for the whole year, it will up United's CASM closer to 2%.
Investors should be aware that the groundings not only result in lost revenue for affected airlines but also drive costs up, since planes with lower capacity tend to have a higher CASM than larger planes, like the MAX, have. Delta and United had excellent 2019 earnings, but both expect 2020 to be slower. For United, that could mean some seriously disappointing comps given its exposure to the MAX. United currently has 14 MAX planes in its fleet with orders for over 100 more.
There's no denying that Boeing stock is a tough pill to swallow in the near term, especially given the fierce competition. Boeing will likely remain in the doghouse for the first half of the year and lose further ground to Airbus. That being said, it could return to be a premium dividend stock over the long term if the company handles these next few months well in an effort to rectify previous transgressions.
Southwest Airlines remains a premium value stock and one of the healthiest airlines from a financial perspective, but it also is the most severely affected by the MAX groundings. American and United are also negatively impacted, whereas Alaska and JetBlue gain a distinct advantage as smaller airlines operating without the burden of commitment to the MAX. Delta Airlines, given its size and monster 2019 performance, looks to further separate itself from the pack as it rides the tailwinds of its lack of exposure to the MAX groundings.