The global grounding of Boeing 737 Max passenger jets is rippling through the airline industry amid a busy spring and summer travel season.
With fewer seats to sell, carriers are seeing a boost in revenue from fuller planes and higher fares. But the tighter capacity is also leaving smaller margin for error, increasing the likelihood of longer flight delays and raising the potential of added expenses as frustrated customers demand compensation.
The pressure is unlikely to subside soon. American Airlines Group Inc., the world’s largest carrier, said Sunday it was extending its cancellation of about 115 daily flights for a fourth time. Those flights aren’t scheduled to get off the ground again until early November, the airline said.
Airlines have been forced to juggle resources after the grounding of Boeing 737 Max fleets in March as investigators probe two crashes five months apart that killed a total of 346 passengers and crew. Three hundred and sixty of the Boeing aircraft are grounded worldwide, with WestJet Airlines Ltd. and Air Canada having 37 between them.
When an unscheduled engine change put a plane operated by WestJet subsidiary Swoop out of commission earlier this month, 23 flights were cancelled over five days. The industry’s lack of planes left Swoop scrambling to reschedule flights and its customers searching for alternative ways to reach their destinations.
“Any other time that I’ve been delayed due to a mechanical issue, the airline partners with other companies to get you home, but in this case they left it completely on the stranded passengers,” said Jamie Abram, whose Swoop flight from Fort Lauderdale, Fla., to Hamilton was rescheduled for seven days after her original travel date.
The small airline tried to charter new flights for passengers, but it found that other airlines did not have the capacity to outsource resources, Swoop spokesperson Karen McIsaac said. Even Swoop parent WestJet, which operates 13 of the on-hold aircraft, did not have any available planes. WestJet did not respond to a request for comment.
“We did exhaust all of our options. We have procedures in place to contact charter airlines, but unfortunately there just wasn’t any availability for us. WestJet also didn’t have availability for us,” Ms. McIsaac said. “Some of the limited availability on chartered aircraft is a result of low supply out there because other airlines are using charter services to recover their travellers.”
Both WestJet and Air Canada have implemented measures in an effort to mitigate the impact of the lost capacity, including extending aircraft leases, trying to speed up fleet delivery, and cancelling and delaying some flights and routes.
Complicating matters, people are travelling in droves this season on the back of recent economic data marking job and wage increases. The International Air Transport Association (IATA) reported that North American air passenger demand in May increased by 4.5 per cent since the same time last year.
At the same time, the growth rate of available seat kilometres, an industry metric measuring global passenger-carrying capacity, slowed in May, increasing by a moderate 2.7 per cent year-on-year. That represents the slowest rate of growth in more than six years, according to the IATA.
Even minor changes in airline capacity can have significant effects on passenger prices, according to Tae Oum, professor at the University of British Columbia’s Sauder School of Business and chairman of the Air Transport Research Society.
“The supply of seats and prices at the margins are very elastic. If demand is growing and this [grounding] represents a large part of fleets, then it could cause a huge increase in prices,” Mr. Oum said in an interview.
Air Canada and WestJet reported first-quarter results in early May, with Max groundings affecting only the final 18 days of operations, but the plane represents about 7 per cent of WestJet’s fleet and 6 per cent of Air Canada’s.
The lost capacity did mean higher expenses for Air Canada, hiking adjusted cost per available seat mile by 3.2 per cent from the same time last year. But even with the hit, passenger revenue per seat mile (RASM), an industry metric that measures how much an airline makes for each seat it flies one mile, jumped 4.5 per cent year-over-year.
The higher costs were mitigated by increased revenue from pricier tickets, according to Bank of Montreal analyst Fadi Chamoun.
“The Max grounding represents a significant industry capacity reduction, particularly in the domestic market. The negative impact to CASM [cost by available seat mile] appears to be substantially offset with higher RASM," Mr. Chamoun wrote in a note.
WestJet reported similar results, with RASM rising by just 0.2 per cent as yields – or average fare per passenger per mile – climbed 0.3 per cent. The company also benefited from lower oil prices, as costs excluding fuel increased less than analysts estimated.
Both companies report second-quarter earnings at the end of July, the first full quarter that will account for the groundings.
Mr. Chamoun expects capacity growth at both of Canada’s major carriers to be cut in half, with Air Canada capacity growth projected to be 2.6 per cent, down from 5.5 per cent, and WestJet at 4.4 per cent, down from 8.5 per cent previously.
The trend is mirrored by U.S. competitors.
American Airlines said that cancelling around 7,800 flights due to the grounding may have cost it US$185-million in pretax income in the second quarter. Even with the revenue hit, the Dallas-based company boosted its RASM forecast on Wednesday to as much as 4 per cent in the three months through June, up from prior guidance at 3 per cent. It also increased its profit-margin guidance to 9.5 per cent from 9 per cent.
American reports second-quarter results at the end of the month.
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Stefanie Marotta