Airline expects to book a quarterly loss, as it took on added costs after winter storm disruption
Southwest Airlines Co. said Friday that it expects its holiday meltdown to wipe out fourth-quarter profits in what has become one of the costliest disruptions the industry has seen in years.
The company estimates that the cancellation of more than 16,700 flights from Dec. 21 through Dec. 31 will reduce its pretax income by $725 million to $825 million in the fourth quarter, resulting in a loss for the period. That includes between $400 million and $425 million in lost revenue, as well as an additional hit from reimbursements to affected travelers, premium pay for employees and other related costs.
A severe winter storm that swept across the country before Christmas initially knocked Southwest off course, but the airline struggled to right itself even as rivals recovered within a few days. Southwest has said that its crew-scheduling system couldn’t keep pace with the number of changes it was having to make, seizing up and eventually requiring the airline to manually assign flights to pilots and flight attendants.
As cancellations cascaded, the airline slashed nearly two-thirds of its schedule for three days last week in an effort to give itself a chance to reset before returning to normal operations on Dec. 30.
Before the storm hit, Southwest was optimistic about the final months of the year. It had earned about $1 billion in pretax income in the first nine months of 2022 and announced in December that it would restore its quarterly dividend, which it suspended in 2020 as the pandemic decimated travel demand and federal aid came with restrictions on such payments.
Now the airline faces questions about whether it had waited too long to make necessary investments in new technologies.
Airline executives have acknowledged that some of Southwest’s systems hadn’t kept pace with the airline’s growing size and complexity and had said modernizing aging technology would be a priority in the coming years. But union officials have said those investments haven’t come swiftly enough. The Southwest Airlines Pilots Association had cautioned throughout the past year that a bad storm could easily push Southwest’s operations into disarray.
Chief ExecutiveBob Jordansaid the airline spends about $1 billion a year on technology, but that the disruptions would prompt the airline to re-examine its plans and potentially accelerate some investments.
“We want to look at our processes, our technology, our systems, our activation. Everything to me is on the table here. It has to be on the table,” he said in an interview Thursday. “The most important thing is to mitigate the risk of this ever happening again.”
Southwest has said its problems disrupted travel for millions of people and has said it would provide refunds and will reimburse “reasonable” expenses such as hotel rooms, rental cars and fares on rival airlines for customers whose travels were disrupted. It has also been doling out awards of 25,000 frequent-flier points to travelers who were affected, which the airline has said equal about $300—something it said was included in the cost estimate released Friday.
Southwest enlisted volunteers—other employees from around the company—to help it process refunds and work through the backlog of missing baggage that had been piling up at airports, shipping them by FedEx and UPS in some cases.
Mr. Jordan said Thursday that about 95% of the missing bags have been reunited with their owners or are on their way, and the airline has processed about 75% of refund requests. The airline has hired an outside firm to help it go through the requests for expense reimbursements, he said.
Southwest’s estimates make this one of the most costly mass-cancellation events in recent years—some analysts said they couldn’t recall a more expensive snafu. The price tag was higher than the $600 million to $700 million some had anticipated.
Southwest shares rose 4.6% Friday to $35.08.
A smaller disruption in October 2021 cost Southwest about $75 million, including refunds and gestures of goodwill to customers. Spirit Airlines Inc. said a summer 2021 disruption that led it to cancel 2,800 flights over a 10-day period cost it about $50 million. A 2016 outage at Delta Air Lines Inc. caused by a computer glitch resulted in a $150 million reduction in Delta’s pretax profits, the airline said at the time.
The meltdown at Southwest has drawn scrutiny from the Biden administration and harsh criticism from union officials.
Transportation Secretary Pete Buttigieg has said he is closely monitoring how Southwest handles refunds, and some lawmakers have been leaning on the Transportation Department to do more.
Over two dozen members of the House Transportation and Infrastructure Committee wrote to Mr. Buttigieg this week, urging him to address the problem of mass flight cancellations and to hold Southwest accountable. Sen.Maria Cantwell(D., Wash.) said this week that the Senate Committee on Commerce, Science and Transportation intends to hold hearings to look at how to strengthen consumer protection and airline operations.
Mr. Jordan said Southwest is working on a review to better understand what happened and to look at what changes it should make and has engaged Southwest’s unions in that process.
“That work will be done very quickly,” he said.
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