The collapse that forced Southwest Airlines to cancel more than 15,000 vacation flights could cost the airline hundreds of millions of dollars in lost revenue and customer compensation, industry analysts say. The total could be as much as the airline earned in the first nine months of last year.
The crisis shows what can go wrong when a company trusted by millions of people moves too slowly to invest in crucial but unglamorous parts of its business. Southwest struggled to recover from frigid weather after crew scheduling processes failed to keep up with flight cancellations and quickly reassign pilots and flight attendants.
“A number of their employees, flight attendants and pilots had been warning about this for years — that they were underinvesting and that they were one storm away from disaster,” said Helane Becker, general manager and senior analyst at Cowen, an investment firm. Bank.
Southwest declined to provide an estimate of how much the catastrophe would cost or disclose how many passengers were affected by the cancellations. The airline’s CEO Bob Jordan told reporters on a phone call last week that Southwest would accelerate improvements to its systems, but he wouldn’t say how quickly it would act. The airline may provide more details in the coming days and weeks – Southwest is expected to report its quarterly financial results at the end of this month.
Analysts at Jefferies, an investment firm, estimate that the debacle could cost the airline as much as $800 million. About $550 million will accrue directly from the cancellations; Southwest is in danger of losing almost all revenue from those flights, but will still have to pay many of the associated costs, such as wages. Jefferies estimates an additional $250 million would compensate customers for hotel, car rental and other expenses. The carrier’s net income for the first nine months of 2022 was $759 million.
Other analysts come up with similar estimates. The numbers will depend on how many people are filing claims for reimbursements and how generous or stingy Southwest is in paying claims.
Consider the case of the Horter family to understand how the costs can add up.
After their travel plans went haywire last week, Julie and Len Horter spent hours rescheduling their flight over the phone and at the airport. They save the trip, but not before spending $300 on car rental and a hotel. The amount can be even higher if the couple decides to claim the forfeited money by taking extra time off.
They brought their 14-year-old daughter, Adeline, from their Michigan home to Los Angeles, where she and her high school marching band performed in the Rose Parade, Ms. Horter said. Now the couple hopes that Southwest will keep its promise to reimburse them for their extra expenses.
“This was a once-in-a-lifetime opportunity, and we wouldn’t miss it,” said Ms Horter.
While Southwest’s holiday debacle was unique in its magnitude, the company has faced other smaller meltdowns.
For example, in October 2021, the airline canceled 2,500 flights over a holiday weekend, or about a sixth as many as last month. In securities filings, the company said the installment had cost it about $75 million, including the price of refunds and other attempts to make customers right.
Southwest has said it may take some time to process and pay claims for unused tickets, accommodation, meals or alternate travel arrangements from the holiday cancellations. But it has begun to appease customers in other ways. The company said this week that customers whose flights were canceled or significantly delayed would receive 25,000 frequent flyer points, worth about $300, according to Southwest.
One cost that is very difficult to estimate is how much Southwest could spend right now upgrading its processes, including those for scheduling pilots and crews. That system became overwhelmed as the number of canceled flights piled up, turning what could have been a manageable disruption into a catastrophe.
Southwest said it had already taken some steps to modernize the system, but analysts said the company would 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 this under pressure can be even more.
“You’re looking at a pretty big hit in what is already an inflationary environment,” said Scott Forbes, an aerospace and defense industry analyst at Jefferies.
Southwest has the resources to invest. It has long had lower debt and been more consistently profitable than other major airlines. Southwest has never sought bankruptcy protection, unlike several of its biggest competitors or their predecessors.
Southwest had so much profit that it paid out nearly $10 billion to shareholders in the five years leading up to the pandemic, equivalent to half the money generated by its operations during that period. The union representing the airline’s pilots and other labor groups have criticized the company’s management for those payouts, arguing that executives should have spent some of that money years ago to modernize the technology. Last month, Southwest said it would restore its stock dividend, which was suspended in 2020, to save money and comply with restrictions placed on airlines receiving federal aid.
Southwest said in a statement that it had been paying regular quarterly dividends for more than 40 years, while at the same time “balancing the needs of our valued 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 debacle, that may change.
“They’re going to want people to see that they’re taking this issue very seriously,” said Ms Becker, the analyst.
When Southwest reports its quarterly financial results on Jan. 26, “I would imagine they get a little more specific about what they’re prioritizing, what they’re working on next,” said Christopher Raite, an analyst at Third Bridge, an investment research firm.
The company may also feel compelled to disclose more about its activities and plans to satisfy regulators and lawmakers.
Senator Maria Cantwell, the Washington Democrat who heads the trade committee that oversees the transportation sector, said this week she had spoken with Mr. Jordan, the airline’s CEO, and planned to hold hearings on how to protect consumer and aviation activities can be strengthened .
Pete Buttigieg, the transportation secretary, said his agency would keep a close eye on Southwest to ensure affected passengers are properly compensated.
“In 2023, we will continue our work from accountability for Southwest Airlines to further progress in supporting all air passengers through enforcement, regulatory and transparency measures,” he said. said on Twitter.
In a securities filing last year, Southwest warned it could face sanctions if it was “unable to make timely or effective changes to its systems.”
Perhaps the most important group of people Southwest has to win over are travelers like Gregg Saunders.
Mr. Saunders, his wife and their two children were visiting relatives in Connecticut when they learned that their December 28 return flight to Denver had been canceled. After considering a Frontier Airlines flight with a long overnight stay, they drove home. Mr. Saunders estimated that his family had spent $900 on a rental car, gas, lodging, food, parking and tolls.
He said his family was loyal to Southwest because of frequent flyer benefits, such as the right to take a companion on flights for free and the airline’s strong presence at Denver International Airport. He is confident that the company will do his customers good.
“Everyone makes mistakes – things happen – but you have to make people better, fix it or say you’re sorry,” Mr Saunders said. “I think Southwest does, so yeah, we’ll keep flying it.”
