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American expects 737 Max grounding cost to rise to $540m

American Airlines expects its total cost for the grounding of the Boeing 737 Max to be about $540 million in pre-tax earnings in 2019, up from a previous estimate of $400 million.

The Dallas/Fort-Worth-based airline took a $140 million hit in the third quarter alone for the grounding of its fleet of 24 Max aircraft, the company says in its quarterly investor update on 24 October.

Chief executive Doug Parker says that the airline expects compensation from Boeing for the losses it has incurred, and “wants to make sure that Boeing’s shareholders share the cost of Boeing’s failures, not American’s shareholders.”

Negotiations on this compensation are “underway, early, productive,” Parker adds. “There is still no real clarity at this point, but we are highly confident that the losses that AA incurred will not be incurred by AA shareholders.”

The airline has now taken the aircraft out of its schedule until 15 January, about a week longer than previously estimated.

In addition to the current fleet of 24 Max aircraft in storage, the airline has an additional 76 aircraft on order, of which five were scheduled to be delivered in the third quarter. As a result of the grounding on 13 March following two crashes, American cancelled 9,475 flights during the third quarter.

After the 737 Max is re-certificated by the Federal Aviation Administration (FAA), American says it will return the aircraft to service in a phased approach. Service will begin with five aircraft, representing 20 departures a day, followed by 12 aircraft two weeks later, and the remaining seven two weeks after that.

“We are reasonably confident that we will have five aircraft in the schedule from January 15th,” Parker adds. “We think that the FAA is showing real leadership on safety. Once it is recertified it will be the safest aircraft in the world and we are looking forward to that date.”

The company had planned to have an additional 26 Max aircraft by the end of 2020, bringing the total up to 50. American says 10 of those have been built already, but it is uncertain when they will be delivered, or when the remaining aircraft will be built and delivered.

“We want these airplanes. As soon as they are certified and pilots are trained we’d like to get them as soon as possible,” Parker adds. “If anything we’d like to accelerate the delivery schedule.”

Net profit in the third quarter rose 14% percent to $425 million from $372 million in the same period a year earlier on lower fuel costs, the company says in its quarterly investor update. Revenue in the quarter was up 3% to a record $11.9 billion on strong passenger demand. Passenger revenue per available seat mile (RASM) rose to 14.50 cents, up just 3% from the same quarter a year ago.

“Our earnings were hindered by two things we fully expect to be behind us next year. Whatever earnings will be in 2019, they will be a good bit better in 2020,” Parker says.

LABOUR DISPUTE

In addition to the 737 Max grounding, American has been dealing with a laboUr dispute with its mechanics’ unions – the International Association of Machinists and Aerospace Workers (IAM) and Transport Workers Union (TWU) – during the quarter, accusing them of an "illegal work slowdown" that resulted in the cancellation or delay of thousands of flights.

The company declines to give an update on the negotiations, except to say that it is “happy” with their progress.

A321NEO UPDATE

Aside from the new Max aircraft, American also expects to take delivery of 21 new A321neos between now and the end of 2020. Of those, nine are expected to come from Airbus’ Mobile Alabama plant, thus skirting the tariffs imposed earlier this month on foreign-built aircraft. Six will come from Europe and six are still to be determined, chief financial officer Derek Kerr says.

“We know that the US trade representative (USTR) placed the tariffs to ensure the burden did not get borne by the US, but rather by the French,” Parker says. “We are working with Airbus to mitigate that. The answer though is for this to be worked out. The goal is not to have these tariffs borne by US airlines and passed on to US passengers,” chief executive Doug Parker adds.

SOUTH AMERICA NETWORK

Following a Chilean court’s decision to deny American Airlines a proposed joint venture with LATAM in May, competitor Delta jumped in to invest $1.9 billion in the Latin American airline. Subsequently, LATAM left American’s Oneworld alliance. This in turn led to speculation that American may be looking for a new partner to expand in what has traditionally been a strong region for the airline. Executives say that the airline is on the lookout for an appropriate suitor in the region.

“Our network is the best in South America, and there is a lot we can do to augment that. Customers are choosing to fly American, of course that network could be rally attractive to a lot of partners and we are evaluating that. So there’s good things to come,” Kerr adds

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