Southwest Airlines Co. (NYSE: LUV) recently reached a confidential agreement with The Boeing Company (Boeing) to compensate Southwest for a portion of projected financial damages related to the grounding of the airline's Boeing 737 MAX aircraft. In light of this agreement, the Southwest Board of Directors has authorized a discretionary, incremental profitsharing accrual for Employees, which is tied to the projected reduction in operating income for annual 2019 due to the MAX groundings. The Company currently estimates this incremental profitsharing accrual to be approximately $125 million.
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "Our People have done an incredible job managing through the MAX groundings, while providing the highest levels of Customer Service and one of the best operational performances in our history. On behalf of the Southwest Board of Directors, we are grateful to our Employees for their extraordinary efforts throughout the year and are pleased to share proceeds from our recent agreement with Boeing."
This incremental profitsharing award will be funded as part of the Company's annual 2019 profitsharing distribution in 2020, in accordance with normal ProfitSharing Plan policies and Board of Director approval. The Company plans to provide 2019 profitsharing details early next year, including the percentage each eligible Southwest Employee will receive.
The Company continues to engage in ongoing discussions with Boeing regarding compensation for damages related to the MAX groundings. The details of these discussions and the settlement with Boeing are confidential. While still evaluating the applicable accounting principles, the Company currently expects to account for substantially all of the compensation as a reduction in cost basis of both existing and future firm aircraft orders, which will reduce depreciation expense in future years.
The Boeing 737 MAX fleet has been grounded since the Federal Aviation Administration's (FAA) order was issued on March 13, 2019. Southwest Airlines continues to monitor information from Boeing and the FAA on the impending 737 MAX software enhancements and training requirements. The airline remains confident that, once certified by the FAA, the enhancements will support a safe return of the 737 MAX aircraft.
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