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Southwest’s Meltdown Could Cost It As much as $825 Million


The meltdown that forced Southwest Airlines to cancel greater than 16,700 holiday flights could cost the carrier between $725 million and $825 million, the airline said in a filing on Friday. The whole represents about as much because the airline earned in the primary nine months of last yr.

The crisis shows what can go mistaken when an organization that hundreds of thousands of individuals depend on moves too slowly to take a position in crucial but unglamorous parts of its operation. Southwest struggled to get better from frigid weather after its crew scheduling processes didn’t sustain with flight cancellations and quickly reassign pilots and flight attendants.

“A lot 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 Helane Becker, a managing director and senior analyst at Cowen, an investment bank.

Southwest said on Friday that it now expects to report a loss in the ultimate three months of 2022. About half of the associated fee it expects to incur in that quarter — $400 million to $425 million — pertains to revenue lost from the canceled flights. The remaining amount stems from spending on customer reimbursements, the worth of loyalty points offered to affected passengers and additional time pay for workers.

Southwest canceled about as many flights within the last 10 days of 2022 because it did within the 10 months prior, based on FlightAware data. The airline declined to reveal what number of passengers were affected by the cancellations, though estimates run into the tons of of hundreds.

Southwest’s chief executive, Bob Jordan, told reporters on a call last week that Southwest would speed up improvements to its systems, but he wouldn’t say how quickly it might act. The airline may provide more detail in the times and weeks ahead — Southwest is scheduled to report its quarterly financial results at the tip of this month.

The continuing cost to the airline may even depend upon how many individuals file claims for reimbursements and the way generous or stingy Southwest is in paying claims.

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

After their travel plans were upended last week, Julie and Len Horter spent hours attempting to reschedule their flight over the phone and on the airport. They salvaged the trip, but not before spending $300 on automotive rentals and a hotel. The quantity may very well be even higher if the couple determine to assert the cash they forfeited by taking additional time off work.

They were taking their 14-year-old daughter, Adeline, from their home in Michigan to Los Angeles, where she and her highschool marching band performed within the Rose Parade, Ms. Horter said. Now, the couple hope that Southwest will make good on its promise to reimburse them for his or her extra expenses.

“This 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 corporate has faced other, smaller meltdowns.

In October 2021, for instance, the airline canceled 2,500 flights over a vacation weekend, or about one-sixth as many because it did last month. In securities filings, the corporate said that episode had cost it about $75 million, including the value of refunds and other efforts to do right by customers.

Southwest has said it could take a while to process and pay claims for unused tickets, lodging, meals or alternate travel arrangements from its holiday cancellations. However it has begun attempting to appease customers in other ways. The corporate said this week that customers whose flights were canceled or significantly delayed would receive 25,000 in frequent-flier points, that are price about $300, based on Southwest.

One cost that may be very hard to estimate is how much Southwest might now spend on upgrading its processes, including the one for scheduling pilots and crews. That system became overwhelmed as flight cancellations piled up and turned what may need been a manageable disruption right into a catastrophe.

Southwest said it had already taken some steps to modernize the system, but analysts said the corporate would probably be forced to hurry up those investments. Upgrading complex operations and software systems, lots of which use old technology and are built and modified over a few years, is all the time expensive and difficult. Doing so under pressure could be much more so.

“You’re taking a look at a reasonably substantial hit in what’s already an inflationary environment,” said Scott Forbes, an aerospace and defense industry analyst at Jefferies.

Southwest has the wherewithal to take a position. It has long had lower debt and been more consistently profitable than other large airlines. Southwest has never sought bankruptcy protection, unlike several of its biggest competitors or their predecessor airlines.

Southwest was so flush with profits that it paid out nearly $10 billion to shareholders over the five years leading as much as the pandemic, corresponding to half the money generated by its operations over that period. The union that represents the airline’s pilots and other labor groups have criticized the corporate’s management for those payouts, arguing that executives must have spent a few of that money to modernize its technology years ago. Last month, Southwest said it might reinstate its stock dividend, which was suspended in 2020 to conserve money and to comply with restrictions imposed on airlines receiving federal aid.

Southwest said in an announcement that it had commonly issued quarterly dividends over greater than 40 years, all while “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 lately. But due to the scheduling system’s role within the recent debacle, that will change.

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

When Southwest reports its quarterly financial results on Jan. 26, “I’d imagine they get a bit 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 corporate can also feel compelled to reveal more about its operations and plans to appease regulators and lawmakers.

Senator Maria Cantwell, the Washington Democrat who leads the Commerce Committee, which oversees the transportation industry, said this week that she had spoken with Mr. Jordan, the airline’s chief executive, and planned to carry hearings on the way to strengthen consumer protections and airline operations.

Pete Buttigieg, the transportation secretary, said his agency would closely monitor Southwest to be certain that it compensated affected passengers appropriately.

“In 2023 we’ll proceed our work, from accountability for Southwest Airlines to further progress supporting all airline passengers through motion on enforcement, rulemaking, and transparency,” he said on Twitter.

In a securities filing last yr, Southwest warned that it could face regulatory penalties if it was “unable to timely or effectively modify its systems.”

Perhaps a very powerful group of individuals Southwest must win over are travelers like Gregg Saunders.

Mr. Saunders, his wife and their two children were visiting family in Connecticut once they came upon that their Dec. 28 return flight to Denver had been canceled. After considering a Frontier Airlines flight with an extended overnight layover, they drove home. Mr. Saunders estimated that his family had spent $900 on a rental automotive, gas, lodging, food, parking and tolls.

He said his family had been loyal to Southwest due to frequent-flier perks like the fitting to take a companion along on flights without cost and the airline’s strong presence at Denver International Airport. He has faith that the corporate will do right by its customers.

“Everybody makes mistakes — stuff happens — but you’ve got to make it higher for people, to repair it or say you’re sorry,” Mr. Saunders said. “I feel Southwest is doing that, so, yeah, we’ll still keep flying them.”

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