Southwest’s holiday travel meltdown to cost airline $400M

Southwest Airlines expects a nearly $1B hit to its bottom line after a winter storm and technology meltdown led to nearly 17,000 canceled flights and stranded hundreds of thousands of holiday travelers.

The cancellations will result in a pretax hit of $725 million to $825 million in the fourth quarter from lost revenue plus extra costs, including reimbursements for travelers and premium pay for employees, Southwest said Friday in a regulatory filing.

The storm and slow recovery was a devastating turn financially and reputationally for the Dallas-based carrier, which led all US airlines in profit during the first nine months of 2022, a year of recovery for the pandemic-battered airline industry.

The massive disruptions started with a winter storm that hit much of the country before Christmas. They snowballed when Southwest’s outdated crew-scheduling technology was overwhelmed, leaving crews and planes out of position to operate flights. Managers and a cadre of volunteer employees at company headquarters were forced to manually reassign pilots and flight attendants to flights.

It took Southwest eight days to recover just before the New Year’s Day weekend, while other major airlines were up and running quickly after the storm passed.

Southwest said in the filing with the Securities and Exchange Commission that it canceled more than 16,700 flights between Dec. 21 and Dec. 31, causing a loss of $400 million to $425 million in revenue. In early December, before the meltdown, Southwest projected fourth-quarter revenue would rise by up to 17% over the same period in 2019, before the pandemic.

The airline said that expenses increased due to reimbursements to customers for out-of-pocket costs — the company has promised to cover “reasonable” bills for hotel rooms, meals and alternate transportation — along with the estimated value of frequent-flyer points it offered to customers, and premium pay and additional compensation for employees.

Just last month, Southwest announced that it would revive dividends for shareholders, which were suspended after the pandemic devastated the airline industry in early 2020. The airline estimates it will pay out $428 million to shareholders this month. US airlines were barred from paying dividends or buying back their own stock until October as a condition of taking $54 billion in federal pandemic aid. Southwest received more than $7 billion in aid.

Since it resumed a normal schedule on Dec. 30, Southwest’s cancellations and flight delays have dropped sharply, roughly in line with other major airlines. The company is working on repairing its damaged reputation.

“I don’t know how many times I have, and can, apologize to our customers, but it’s not enough because we messed up,” CEO Robert Jordan said in an interview Thursday. “But the storm was historic in the number of places it hit, the length of time it stayed, the temperatures.”

Jordan said the company spends about $1 billion a year on technology and is reviewing how systems performed before making decisions on IT spending priorities.

Company officials have disputed union leaders’ claims that the company hasn’t invested enough to update technology, although they concede that the crew-scheduling systems did not get as much attention as other IT spending including aircraft-maintenance operations.

“One could criticize us for prioritizing ground operations and technical operations over crew operations when we started, but at the time that seemed like a proper sequence. Obviously it bit us in retrospect,” Chief Operating Officer Andrew Watterson said last week, “but there was significant modernization work going on.”