Boeing Headwinds Limit Growth Forecasts at Southwest

The airline industry is feeling the pain of Boeing’s ongoing crisis. Southwest Airlines (LUV), which Boeing exclusively supplies, plans to reduce its capacity, freeze most hiring, and re-examine 2024 spending. This is due to delayed aircraft deliveries from the beleaguered manufacturer in the face of continuing regulatory and criminal investigations. The audit followed January’s near-catastrophic Alaska Airlines incident involving Boeing’s 737 MAX. Regulators have capped 737 Max production and have uncovered other Boeing safety concerns. Due to slower-than-expected growth, Southwest now expects a net loss for this quarter and will reevaluate its guidance for the year. Boeing’s woes have caused a fallout on the broader aviation industry. Other airlines, such as Delta, JetBlue, and American, are also adjusting forecasts.

How We Got Here

On January 5, a Boeing 737 MAX door plug flew off during an Alaska Airlines flight soon after takeoff. It was found that the component was not properly bolted to the plane's fuselage due to a manufacturing flaw. An FAA investigation of Boeing and its subcontractor Spirit AeroSystems found that the companies did not comply with quality control requirements. It also found other areas of non-compliance, such as Boeing’s process control, handling and storage of parts, and product control. The FAA’s report cited numerous incidents of alleged non-compliance, and the audit is still ongoing. Last month, the FAA gave Boeing 90 days to present its plan to address systemic quality-control problems.

Caution Necessary Towards Southwest Shares?

Since Boeing is Southwest’s sole supplier, reduced jet deliveries will significantly affect the company this year. As traditional 737s are gradually sunsetting, there is a need for new aircraft to fill the void. Unfortunately, Boeing's series of crises have caused a bottleneck in production, therefore limiting the budget airline's growth.

Southwest now forecasts flat to 2% revenue growth this quarter. As of Tuesday, Southwest was at the bottom of the S&P 500, down 13.9% to $29.09. While its reliance on the 737 was previously seen as a strength, it is now considered a liability due to simpler maintenance and scheduling. However, this current situation is being seen as a delay in Southwest’s growth rather than a sign of the future. The latest guidance from Wall Street analysts is that LUV is currently a “hold.”   

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