Southwest Airlines Co. said the grounding of its Boeing Co. 737 Max fleet and the start of flights to Hawaii will increase cost pressures during the busy summer travel season.

Costs for each seat flown a mile will climb as much as 12.5 per cent this quarter, the carrier said in an earnings release Thursday. The efficiency gauge, which excludes fuel and profit sharing, will jump as much as 6.5 per cent this year, compared with Southwest’s earlier forecast of as much as 3.5 per cent.

Key Insights

  • Higher costs are apt to cause heartburn for investors. In the first quarter, the U.S. government shutdown delayed certification of Southwest’s ability to fly over the ocean and start Hawaii service, adding to the pressure on expenses from the Max grounding.
  • Southwest is getting a boost from strong leisure and corporate travel, while demand for lucrative tickets sold just before flights is strong. Revenue from each seat flown a mile, a key pricing measure, is expected to rise 5.5 per cent to 7.5 per cent this quarter, outpacing forecasts by Delta Air Lines Inc. and United Continental Holdings Inc.
  • Southwest has a lot riding on Boeing’s software update for the 737 Max, which has been grounded for six weeks after two deadly crashes in five months. The airline is the biggest U.S. operator of the model, and is canceling 130 flights daily because of the grounding. Southwest has pulled the Max from its schedules through Aug. 5.

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Market Reaction

  • The stock gained 14 per cent this year through Wednesday, while a Standard & Poor’s index of the five largest U.S. airlines rose 11 per cent. Southwest didn’t immediately trade ahead of the open in New York.