February 29, 2024

The collapse that forced Southwest Airlines to cancel more than 15,000 holiday flights could cost the airline hundreds of millions of dollars in lost revenue and customer reimbursements, industry analysts said. The total is likely to match the airline’s revenue for the first nine months of last year.

The crisis has shown what can go wrong when a company that millions of people depend on moves too slowly to invest in critical but dull parts of its operations. Southwest Airlines struggled to recover from the cold weather after its crew scheduling process failed to keep up with flight cancellations and quickly reassigned pilots and flight attendants.

“Some of their employees, flight attendants and pilots have been warning of this for years — they’re underinvesting, they’re one storm away from disaster,” said Helane Becker, managing director and senior analyst at investment firm Cowen. bank.

Southwest declined to provide an estimate of how much damage the disaster would cause, or how many passengers were affected by the cancellations. The airline’s chief executive, Bob Jordan, told reporters by phone last week that Southwest would accelerate improvements to its systems, but he did not say how quickly. The airline is likely to provide more details in the coming days and weeks — Southwest is scheduled to report its quarterly financial results at the end of the month.

Analysts at investment firm Jefferies estimated the debacle could cost the airline as much as $800 million. About $550 million came directly from the cancellations; Southwest would lose almost all revenue from those flights, but would still have to cover many of the associated costs, such as wages. Jefferies estimates an additional $250 million will reimburse customers for hotel, car rental and other expenses. The airline’s net income for the first nine months of 2022 is $759 million.

Other analysts have come up with similar estimates. Those numbers will depend on how many people file claims and how generous or stingy Southwest is with paying claims.

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

After their travel plans were disrupted last week, Jolie and Lynholt spent hours trying to reschedule their flights on the phone and at the airport. They saved the trip, but before they paid $300 for a car and hotel. The amount could be higher if the couple decides to claim back the money confiscated for taking time off work.

Ms. Hult said they traveled from their home in Michigan to Los Angeles with their 14-year-old daughter, Adeline, where she and her high school band performed in the Rose Parade. Now, the couple is hoping Southwest will follow through on its promise to reimburse them for the extra costs.

“This is a once-in-a-lifetime opportunity and we won’t miss it,” Ms Hult said.

While Southwest’s vacation debacle is unique in its scale, the company has faced other, smaller crashes.

In October 2021, for example, the airline canceled 2,500 flights over a single holiday weekend, about one-sixth of the previous month. In securities filings, the firm said the incident cost it approximately $75 million, including chargeback fees and other efforts to do the right thing for customers.

Southwest said it may take some time to process and pay claims for unused tickets, lodging, meals or alternative travel arrangements due to vacation cancellations. But it has begun trying to reassure customers in other ways. Customers whose flights are canceled or severely delayed will receive 25,000 frequent-flyer points worth about $300, according to Southwest Airlines, the airline said this week.

One cost that is difficult to estimate is how much Southwest Airlines might spend now to upgrade its processes, including the cost of arranging pilots and cabin crew. As flight cancellations piled up, the system became overwhelmed and turned what could have been a manageable disruption into a catastrophe.

Southwest said it has taken some steps to modernize its systems, but analysts said the company may be forced to accelerate those investments. Upgrading complex operations and software systems, many of which use older technologies and have been built and modified over the years, has always been expensive and difficult. Doing so under pressure may be even more so.

“What you’re seeing is a pretty big hit in an already inflationary environment,” said Scott Forbes, an aerospace and defense industry analyst at Jefferies.

Southwest Airlines has enough money to invest. It has long had lower debt and more stable earnings than other large airlines. Unlike several of its biggest rivals or its predecessor airlines, Southwest never sought bankruptcy protection.

Southwest was so profitable that it paid out nearly $10 billion to shareholders in the five years before the pandemic, or half of the cash it generated from operations during that time. union representing airline pilots and other labor groups have criticized the spending by company management, arguing that executives should have spent some of the cash years ago to modernize technology. Last month, Southwest Airlines said it would resume its stock dividend, which was suspended in 2020, to conserve cash and comply with restrictions imposed on airlines receiving federal aid.

Southwest Airlines said in a statement that it has paid regular 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 on technology upgrades in recent years. But that could change because of the role the scheduling system played in the latest crash.

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

When Southwest Airlines reports its quarterly financial results on Jan. 26, “I think they’ll be more specific about their priorities, what they’re going to do next,” said Christopher Flett, an analyst at Third Bridge, an investment research firm. .

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

Sen. Maria Cantwell, a Washington Democrat who sits on the Commerce Committee that oversees the transportation industry, said this week that she has spoken to the airline’s chief executive, Mr. Jordan, and plans to hold a meeting on how to strengthen consumer protections and airline operations Hearings.

Transportation Secretary Pete Buttigieg said his agency will be watching Southwest closely to ensure it properly compensates affected passengers.

“In 2023, we will continue our work, from holding Southwest accountable to further supporting all airline passengers through actions in enforcement, rulemaking and transparency,” he said. tweeted.

In a securities filing last year, Southwest warned it could face regulatory penalties if it “fails to amend its systems in a timely or effective manner.”

Perhaps the most important group of people Southwest needs to win over is travelers like Greg Saunders.

Mr. Sanders, his wife and their two children were visiting family in Connecticut when they discovered their Dec. 28 flight back to Denver had been cancelled. After contemplating a Frontier Airlines flight and a long overnight layover, they drove home. Mr. Sanders estimated his family spent $900 on rental cars, gas, lodging, food, parking and tolls.

His family has remained loyal to Southwest, he said, because of frequent-flyer perks, such as the right to bring a companion on a flight for free, and the airline’s strong presence at Denver International Airport. He trusts the company to do the right thing for its customers.

“Everyone makes mistakes – things happen – but you have to make people better off, fix it or say you’re sorry,” Mr Saunders said. “I think Southwest is doing that, so, yes, we’re still going to fly.”

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