Air Canada: A case study in the 737 MAX fallout for airlines

An Air Canada jet flying overhead

If you think the lost availability of the Boeing 737 MAX due to the worldwide grounding is just a minor inconvenience for airlines, consider this: Air Canada is paying salary and benefits to 400 pilots it hired and trained to fly the MAX who are sitting around with nothing to do until the airplane is cleared for commercial service. 

While North American competitors fly the 737 NG – the upgraded version of  Boeing’s venerable small jetliner that has flown in various versions since the late 1960s – the MAX is the first 737 series to join Air Canada’s fleet. That means there are no similar aircraft for the MAX pilots to fly in the interim.

The unexpected, incremental cost to cover pilot compensation is just one of many operational, scheduling, logistics, administrative and revenue headaches Air Canada, like it’s North American competitors, is coping with in the absence of the MAX, a plane that is central to its growth strategy. 

Air Canada’s fourth quarter net income decreased CA$8 million ($6.1 million) as operating expenses increased 6%, largely due to the no-fly order for the MAX and flying more expensive replacement aircraft. The lost MAX capacity – 8 billion available seat miles effectively not flown last year – contributed to a 1% dip in U.S. traffic in the fourth quarter and is impacting certain long-haul markets like Hawaii. It is the primary reason the airline is projecting earnings to be CA$200 million lower in the first quarter than in 2019.

“We operated approximately 97% of our schedule in 2019, and our efforts from the outset have been focused on minimizing disruption for our customers so they maintain confidence to book with Air Canada while also preserving value for our shareholders,” CEO Calin Rovinescu told analysts on last week’s earnings call. 

The grounding hit Air Canada harder than other airlines because the MAX represents a larger portion of its passenger capacity – about one-quarter of its narrow-body fleet. The carrier had 24 MAX in its fleet at the time of the grounding. Officials on the earnings call said they expect to start gradually introducing the MAX jets into their schedule in the third quarter, and that deliveries of 20 more planes will be pushed back until late this year and into 2021.

The airline estimates that had it operated the 36 Boeing MAX aircraft as originally planned in 2019, adjusted unit costs would have increased about 2.5% rather than 4.1%. With 50 MAX aircraft originally anticipated by this summer, Air Canada had hoped to have 13 billion available seat miles flown in 2020.

Boeing says it expects the U.S. Federal Aviation Administration to clear the MAX for return to service in the next few months, once fixes to flight control software implicated in two deadly crashes and other fixes are approved. The aircraft manufacturer will then resume production by mid-summer. 

But airlines, seeking to avoid operational snafus in case of further delays, have extended their schedule blackouts past the busy summer season. American Airlines and United Airlines recently pulled the MAX from their schedules through Aug. 17 and Sept. 3, respectively, from previous start dates in early June, and Southwest Airlines revised its schedule through Aug. 10. 

Beyond paying the cost of idle pilots, Air Canada has implemented many workarounds to mitigate the disruption caused by the MAX grounding. It has held onto older aircraft it planned to get rid of, either through lease extensions or sale deferrals and added aircraft from other airlines or leasing companies. It wet-leased aircraft – with pilots from third-party providers doing the flying – and it covered select mainline flights with its low-cost subsidiary, Air Canada Rouge, and regional partners. 

The older aircraft burn more fuel and require more maintenance than the MAX. The aircraft’s new LEAP engines are 10% to 12% more fuel efficient than previous 737 versions and allow it to fly further.

Substituting from other parts of the network “deviates from several of our scheduling guidelines and creates inconsistency for our customers,” Chief Commercial Officer Lucie Guillemette said on the call. “However, mitigation tactics such as this are necessary when faced with the alternative of spending on routes or further reducing capacity.”

Air Canada, like other airlines, is also upsizing some flights. In the first quarter of 2019, Air Canada had six daily flights from Western Canada to Hawaii with 737 MAX aircraft. Now it is backfilling the capacity with less efficient wide-body aircraft, impacting the route’s profitability, she explained. 

International markets are being hurt by the MAX removal too because there is less connecting traffic through the airline’s hubs as it consolidates frequencies to several U.S. cities. And Air Canada had to temporarily suspend service between Halifax and St. John’s to the U.K., she said.

The Montreal-based carrier also has deferred cabin upgrades for its Airbus A-330 fleet because the planes were needed to fill in for the MAX, Chief Financial Officer Mike Rousseau said.

Air Canada’s North American competitors similarly face rising unit costs, restricted revenue growth and impaired network connectivity. 

A determining factor in when airlines will resume MAX service is whether global aviation authorities require pilots to undergo simulator training. Doing so would add extra time for airlines to be ready, especially since there were only about three dozen simulators worldwide at the start of the year, according to Reuters. Post-crash investigations determined that pilots were unfamiliar with how to respond when the augmented flight control system wrested control of the planes from the crew to prevent a perceived stall and mistakenly pushed them into a nosedive. Last month, Boeing reversed course and recommended simulator training for all pilots who will fly the MAX. 

Officials said Air Canada has two simulators and has part-time access to another simulator on a rental basis, primarily because the airline didn’t operate the 737 NG, and pilots will be requalified on them. 

More MAX quality control issues

On Saturday, Boeing confirmed it had found debris that mechanics left inside fuel tanks in more than two-thirds of 737 MAX aircraft it inspected, according to news reports. Metal shavings, tools and rags could damage sensitive components or potentially block a fuel line. 

The aerospace giant has built 385 MAX aircraft and parked them on several airfields until the government allows them to be delivered to customers. Boeing officials say they plan to inspect all the undelivered planes, but have not determined whether to inspect all the delivered MAXes too. 

Boeing has previously had problems with foreign objects discovered inside planes’ bowels, notably with the KC-46 military air tanker and the 787 Dreamliner made in Charleston, South Carolina.

Earlier this month, Boeing fired a vice president who was in charge of pilots who exchanged internal emails that indicated a cavalier attitude toward safety and efforts to mislead FAA officials about modifications to the MAX flight control system, the Wall Street Journal reported