The crisis that forced Southwest Airlines to cancel more than 16,700 flights during the holiday could cost the airline between $725 million and $825 million, the airline said. said in a filing on Friday. The total amount is equivalent to what the airline earned in the first nine months of last year.
The crisis shows what can go wrong when a company that millions of people rely on moves too slowly to invest in its vital but unattractive parts of the business. Southwest has struggled to recover from the cold weather after its crew planning process failed to keep up with canceled flights and quickly reassigned pilots and flight attendants.
Helane Becker, managing director and senior analyst at Cowen, said: “Some of their employees, flight attendants and pilots have been warning about this for years – that they are investing too much. level and that they were only one storm away from disaster.” bank.
Southwest said Friday that it now expects to post a loss for the last three months of 2022. About half of the costs are expected to be incurred that quarter — $400 million to $425 million. – related to lost revenue due to canceled flights. The remainder comes from spending on customer reimbursements, the value of loyalty points provided to affected passengers, and overtime pay for employees.
According to FlightAware data, Southwest canceled about as many flights in the last 10 days of 2022 as it did in the previous 10 months. The airline declined to disclose how many passengers were affected by the flight cancellations, though estimates run into the hundreds of thousands.
Southwest CEO Bob Jordan told reporters on a call last week that Southwest will accelerate improvements to its systems, but he did not say how quickly it would act. The airline may provide more details in the coming days and weeks — Southwest is expected to report quarterly financial results later this month.
Ongoing costs to the airline will also depend on the number of claimants and how generous or stingy Southwest is in paying the claims.
To understand how costs can add up, consider the case of the Horter family.
After their travel plans were canceled last week, Julie and Len Horter spent hours trying to reschedule their flight over the phone and at the airport. They saved the trip, but not before spending $300 on car and hotel rentals. The amount could be even higher if the couple decides to reclaim the money they have lost by taking overtime leave.
Horter said they were bringing 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 make good on its promise to reimburse them for the costs incurred.
“This is a once-in-a-lifetime opportunity and we are not going to miss it,” Ms. Horter said.
While Southwest’s holiday debacle is unique in size, the company has faced other, smaller crises.
For example, in October 2021, the airline canceled 2,500 flights over the holiday weekend, or about one-sixth of the flights canceled last month. In a stock filing, the company said that episode cost about $75 million, including price refunds and other efforts to get customers to get it right.
Southwest says it may take some time to process and pay claims for tickets, accommodation, meals or alternative travel arrangements due to vacation cancellations. But it has begun to try to appease customers in other ways. The company said this week that customers whose flights are canceled or significantly delayed will receive 25,000 frequent flyer points, worth about $300, according to Southwest.
One cost that is difficult to estimate is how much Southwest can currently spend on upgrading its processes, including pilot and crew planning. That system became overwhelmed as canceled flights piled up and turned what could have been a manageable disruption into a disaster.
Southwest said it has taken some steps to modernize the system, but analysts say the company will likely be forced to accelerate those investments. Upgrading complex operations and software systems, many of which use old technology and have been built and modified over many years, is always expensive and difficult. Doing so under pressure can be even more so.
“You’re looking at a pretty big hit in an already inflationary environment,” said Scott Forbes, aerospace and defense industry analyst at Jefferies.
Southwest has money to invest. It has long had lower debt and has consistently been more profitable than other major airlines. Southwest has never filed for bankruptcy protection, unlike some of its biggest competitors or its predecessor airlines.
Southwest made so much profit that it spent nearly $10 billion on shareholders in the five years before the pandemic, or half of the cash generated by the company’s operations during that period. Union representing airline pilots and other labor groups have criticized the company’s management over those payments, arguing that executives should have spent some of that money modernizing the company’s technology over the years. prior to. Last month, Southwest said it would reinstate its stock dividend, which was suspended in 2020 to save cash and comply with restrictions on airlines receiving federal aid.
Southwest said in a statement that it has been issuing quarterly dividends regularly for more than 40 years, all of which “balance the needs of our key employees, customers and shareholders.”
Like other airlines, Southwest has not disclosed how much it has spent on upgrading its technology in recent years. But given the role of the scheduling system in the recent crash, that could change.
“They’re going to want people to see that they’re taking this very seriously,” said Ms. Becker, an analyst.
When Southwest reported its quarterly results on January 26, “I imagine they’d be a little more specific about what they’re prioritizing, what they’re working on next,” said Christopher Raite, an analyst. analyst at Third Bridge, said. investment research firm.
The company may also feel compelled to disclose more about its operations and plans to appease regulators and lawmakers.
Senator Maria Cantwell, a Washington Democrat who heads the Commerce Committee, the shipping industry watchdog, said this week that she spoke with Mr. Jordan, the airline’s chief executive. no and intends to hold hearings on how to strengthen consumer protection and airline operations.
Pete Buttigieg, secretary of transportation, said his agency will closely monitor Southwest to make sure it compensates affected passengers appropriately.
“In 2023, we will continue our work, from accountability to Southwest Airlines to further progress in supporting all airline passengers through enforcement action, building rules and regulations. rules and transparency,” Mr say on Twitter.
In a securities filing last year, Southwest warned it could face regulatory penalties if it “failed to make timely or effective modifications to its systems.”
Perhaps the most important group of people Southwest needs to attract are travelers like Gregg Saunders.
Mr. Saunders, his wife and their two children were visiting family in Connecticut when they learned their flight back to Denver on December 28 had been cancelled. After pondering the Frontier Airlines flight with its long overnight transit, they drove home. Mr. Saunders estimates that his family spent $900 on a car rental, gas, accommodation, food, parking and tolls.
He said his family has been loyal to Southwest because of frequent flyer perks like the right to free travel companions and the airline’s strong presence at the International Airport Denver. He has faith that the company will do the right thing with its customers.
“Everybody makes mistakes — things happen — but you have to make people better, make amends or apologise,” Mr. Saunders said. “I think Southwest is doing that, so yeah, we’re going to keep using them.”
