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The Southwest collapse could cost it up to $825 million

The Southwest collapse could cost it up to $825 million

The Southwest collapse could cost it up to $825 million

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The collapse that forced Southwest Airlines to cancel more than 16,700 holiday flights could cost the carrier between $725 million and $825 million, the airline said in a filing Friday. The total represents roughly as much as the airline earned in the first nine months of last year.

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The crisis shows what can go wrong when a company that millions of people rely on moves too slowly to invest in crucial but unglamorous parts of its operation. Southwest struggled to recover from freezing weather after its crew planning processes failed to track flight cancellations and quickly reassign pilots and flight attendants.

“A number of their employees, flight attendants and pilots, have been warning about this for years – that they were underinvesting and they were a storm away from disaster,” said Helane Becker, chief executive. and Principal Analyst at Cowen, an investment firm. bank.

Southwest said Friday it now expects to report a loss in the last three months of 2022. About half of the costs it expects to incur in this quarter — $400 million to $425 million — are related to lost revenue due to canceled flights. The remaining amount comes from customer reimbursement expenses, the value of loyalty points offered to affected passengers and employee overtime compensation.

According to data from FlightAware, Southwest canceled about as many flights in the last 10 days of 2022 as in the previous 10 months. The airline declined to disclose the number of passengers affected by the cancellations, although estimates run into the hundreds of thousands.

Southwest chief executive Bob Jordan told reporters on a call last week that Southwest would accelerate improvements to its systems, but he didn’t say how quickly he would act. The airline could provide more details in the coming days and weeks – Southwest is expected to release its quarterly financial results at the end of this month.

The ongoing cost to the airline will also depend on how many people file claims and how generous or stingy Southwest is in paying claims.

To understand how the costs can add up, consider the case of the Horter family.

After their travel plans were turned upside down 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 rental and hotel. The amount could be even higher if the couple decides to reclaim the money they lost while taking extra leave.

They were taking 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 are hoping Southwest will keep their promise to reimburse them for their extra expenses.

“It was a once-in-a-lifetime opportunity, and we weren’t going to miss it,” Ms Horter said.

While Southwest’s holiday debacle was unique in its scale, the company has faced other, smaller meltdowns.

In October 2021, for example, the airline canceled 2,500 flights over a bank holiday weekend, about a sixth less than last month. In title filings, the company said the episode cost it about $75 million, including the price of refunds and other efforts to do good by customers.

Southwest said it may take some time to process and pay claims for unused tickets, accommodations, meals or alternative travel arrangements from its vacation cancellations. But he started trying 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.

A very difficult cost to estimate is how much Southwest could now spend upgrading its processes, including pilot and crew scheduling. That system was overwhelmed as flight cancellations piled up and turned what could have been a manageable disruption into a disaster.

Southwest said it has already taken some steps to modernize the system, but analysts said the company will likely be forced to accelerate those investments. Upgrading complex operations and software systems, many of which use old technology and are built and modified over many years, is always expensive and difficult. Doing it under pressure can be even more so.

“You’re looking at a pretty big hit in what’s already an inflationary environment,” said Scott Forbes, aerospace and defense industry analyst at Jefferies.

Southwest has the means to invest. It has long had lower debt and been more consistently profitable than other major airlines. Southwest has never filed for bankruptcy protection, unlike many of its larger competitors or their predecessors.

Southwest was so rich in profits that it paid out nearly $10 billion to its shareholders in the five years before the pandemic, equivalent to half the cash generated by its operations during that period. The union that represents the airline’s pilots and other labor groups have criticized the company’s management for the payments, arguing that executives should have spent some of the money upgrading its technology years ago. . Last month, Southwest announced it would reinstate its stock dividend, which was suspended in 2020 to save money and comply with restrictions on airlines receiving federal aid.

Southwest said in a statement that it has consistently issued quarterly dividends for more than 40 years, while “balancing the needs of our valued employees, customers and shareholders.”

Like other airlines, Southwest has not disclosed how much it has spent upgrading its technology in recent years. But due to the planning system’s role in the recent debacle, that could change.

“They’ll want people to see that they’re taking this issue very seriously,” said Ms. Becker, the analyst.

When Southwest releases its quarterly financial results on Jan. 26, “I imagine they’re getting a little more specific about what they’re prioritizing, what they’re working on next,” said Christopher Raite, an analyst at Third Bridge, a investment research.

The company may also feel compelled to disclose more about its operations and plans to appease regulators and lawmakers.

Senator Maria Cantwell, the Washington Democrat who heads the Commerce Committee, which oversees the transportation industry, said this week she had spoken with Mr. Jordan, the airline’s chief executive, and planned to hold hearings on how to strengthen consumer protection and air operations. .

Pete Buttigieg, the transport secretary, said his agency would be watching Southwest closely to ensure it appropriately compensates affected passengers.

“In 2023, we will continue our work, from accountability for Southwest Airlines to further progress for all airline passengers through enforcement, regulation and transparency,” he said. said on Twitter.

In a title filing last year, Southwest warned it could face regulatory penalties if it was “unable to make timely or effective changes to its systems.”

Perhaps the most important group of people Southwest needs to convince are travelers like Gregg Saunders.

Mr. Saunders, his wife and their two children were visiting family in Connecticut when they learned that their Dec. 28 return flight to Denver had been cancelled. After considering a Frontier Airlines flight with a long overnight layover, they returned home. Mr Saunders estimated his family spent $900 on a rental car, gas, accommodation, food, parking and tolls.

He said his family has been loyal to Southwest because of frequent flyer perks like the right to bring a companion on flights for free and the airline’s strong presence at Denver International Airport. He is confident that the company will do the right thing for its customers.

“Everyone makes mistakes – things happen – but you have to make things better for people, fix them or say you’re sorry,” Mr Saunders said. “I think Southwest does, so yeah, we’ll keep flying them.”

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