The recession that forced Southwest Airlines to cancel more than 16,700 holiday flights could cost the carrier between $725 million and $825 million. said in a filing on Friday, Overall, the airline earned what it earned in the first nine months of the previous year.
The crisis shows what can go wrong when a company that millions rely on moves too slowly to invest in important but obscure parts of its operations. Southwest struggled to recover from the cold weather after its crew scheduling procedures failed to quickly cancel flights and reassign pilots and flight attendants.
“Many of their employees, flight attendants and pilots, have been warning about this for years – that they were underinvesting and that they were one storm away from disaster,” said Helen Baker, a managing director and senior analyst at Cowen. An investment strand.
Southwest said Friday that it now expects to report a loss in the final three months of 2022. About half of the cost incurred in that quarter — $400 million to $425 million — is related to lost revenue from canceled flights. The remaining amount stems from spending on customer reimbursements, the value of loyalty points awarded to affected passengers, and overtime pay for employees.
According to FlightAware data, Southwest canceled the same number of flights in the last 10 days of 2022 as it did in the 10 months prior. The airline declined to reveal how many passengers were affected by the cancellations, though estimates are in the hundreds of thousands.
Southwest Chief Executive Bob Jordan told reporters on a call last week that Southwest would accelerate improvements to its system, but he would not say how quickly it would do so. The airline may provide more details in the coming days and weeks – Southwest is due to report its quarterly financial results later this month.
The airline’s ongoing costs will also depend on how many people file claims for reimbursement and how generous or stingy Southwest is in paying claims.
To understand how costs can add up, consider the case of the Horter family.
After their travel plans fell through last week, Julie and Len Horter spent hours on the phone and at the airport trying to reschedule their flight. He saved up for the trip, but not before spending $300 on a car rental and a hotel. This amount can be even higher if the couple decide to claim money lost by taking overtime from work.
Ms. Horter said they were driving their 14-year-old daughter, Adeline, from their home in Michigan to Los Angeles, where she and her high school marching band performed in the Rose Parade. Now, the couple hopes that Southwest will live up to its promise to reimburse them for the additional expenses.
“This was a once in a lifetime opportunity and we weren’t going to miss it,” Ms. Horter said.
While the Southwest holiday debacle was unique in its scale, the company has suffered other, smaller meltdowns.
For example, in October 2021, the airline canceled 2,500 flights over the holiday weekend, or about one-sixth as many as the previous month. In a securities filing, the company said the episode was valued at approximately $75 million, including the cost of refunds and other attempts by customers to make amends.
Southwest has said that it may take some time to process and pay claims for unused tickets, accommodations, meals or alternate travel arrangements. But it has started trying to please customers in other ways. The company said this week that customers whose flights were canceled or significantly delayed would receive 25,000 in frequent flyer points, which are worth about $300 each, according to Southwest.
One cost that is very difficult to estimate is how much Southwest can now spend on upgrading its processes, including scheduling pilots and crew. The system became overwhelmed as flight cancellations piled up and what could have been a manageable disruption turned into a catastrophe.
Southwest said it has already taken some steps to modernize the system, but analysts say the company will probably be forced to accelerate those investments. Upgrading complex operations and software systems, many of which use older technology and have been built and modified over many years, is always costly and difficult. Doing so under pressure can be even more so.
“You’re already seeing quite a hit in an inflationary environment,” said Scott Forbes, an aerospace and defense industry analyst at Jefferies.
Southwest has the means to invest. It has long had low debt and has been consistently more profitable than other large airlines. Unlike many of its largest competitors or their predecessor airlines, Southwest has never sought bankruptcy protection.
Southwest was so flush with profits that it paid out nearly $10 billion to shareholders in the five years before the pandemic, equal to half of the cash generated by its operations during that period. union that represents airline pilots And other labor groups have criticized the company’s management for those payments, arguing that executives should have spent some of that cash years ago to modernize its technology. Last month, Southwest said it would reinstate its stock dividend, which was suspended in 2020, to conserve cash and comply with restrictions placed on airlines receiving federal aid.
Southwest said in a statement that it had regularly issued a quarterly dividend for more than 40 years, while “balancing the needs of our valued employees, customers and shareholders.”
Like other airlines, Southwest hasn’t disclosed how much it has spent on upgrading its technology in recent years. But because of the scheduling system’s role in the recent debacle, that may be about to change.
“They want people to see they are taking this issue very seriously,” said Ms Baker, the analyst.
When Southwest reports its quarterly financial results on Jan. 26, “I think let’s get a little more specific about what they’re prioritizing, what they’re working on next,” said an analyst at Third Bridge. Christopher Wright said. investment research firm.
The company may feel compelled to disclose more about its operations and plans to appease regulators and lawmakers.
Senator Maria Cantwell, the Washington Democrat who leads the Commerce Committee that oversees the transportation industry, said this week that she had spoken with Mr. Jordan, the airline chief executive, on how to strengthen consumer protections and airline operations. The hearing was planned. ,
Pete Buttigieg, the secretary of transportation, said his agency would closely monitor Southwest to ensure that affected passengers were properly compensated.
“In 2023 we will continue our work to advance the accountability for Southwest Airlines to all airline passengers through action on enforcement, rulemaking and transparency,” he said. said on twitter,
In a securities filing last year, Southwest warned that it could face regulatory penalties if it was “unable to timely or effectively modify its systems.”
Perhaps the most important group of people Southwest has to conquer are travelers like Greg Saunders.
Mr Saunders, his wife and their two children were visiting family in Connecticut when they learned their return flight to Denver on December 28 had been cancelled. After a long overnight layover, they headed home after considering a flight on Frontier Airlines. Mr. Saunders estimated that his family had spent $900 on the rental car, gas, accommodation, food, parking and tolls.
He said his family has remained loyal to Southwest because of frequent flier perks such as the right to carry a companion on flights for free and the airline’s strong presence at Denver International Airport. He is confident that the company will do right by its customers.
“Everybody makes mistakes – things happen – but you have to make it better for people, fix it or say you’re sorry,” Mr Saunders said. “I think Southwest is doing that, so, yeah, we’ll still be flying them.”
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