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Southwest Airlines Co. shares have fallen almost 10%, and its reputation has perhaps taken an even bigger hit as a result of what many are calling the biggest debacle in the company’s 51-year history.
The Dallas-based carrier, known for helping customers who “Wanna Get Away,” did anything but that during the week between Christmas and New Year’s Eve when it canceled thousands of flights during an operational meltdown that left passengers stranded during a time when they wanted to be with their families. While Southwest executives initially blamed bad winter weather, experts say a confluence of factors, including a lack of modernization investments and its unique network operating model, combined to create a perfect storm for the chaos.
Here’s a look at what happened, where things stand and what will happen next.
The meltdown
After a calm Thanksgiving, Mother Nature was less forgiving on Christmas. Severe winter weather caused several thousand flights across all the major airlines to be canceled on Dec. 23, with thousands more delayed and canceled throughout the holiday weekend. More than 3,000 flights were canceled on Christmas alone.
Most airlines had returned to normal operations with few cancellations after the Christmas weekend. Not at Southwest. CEO Bob Jordan announced on Christmas Eve the airline would operate one-third of its scheduled flights for the next several days as it tried to return to normal operations. Southwest continued to struggle and canceled more than 2,900 flights on Dec. 26. It canceled more than 2,500 flights each on Dec. 27-28 as well.
Overall, Southwest canceled about 16,000 flights from the beginning of the winter storm on Dec. 22 through Jan. 1.
Contributing factors
Initially, Southwest blamed the winter storm for all of its troubles. According to a statement released by the company on Christmas Eve, the company was “fully staffed and prepared for the approaching holiday weekend when the severe weather swept across the continent” Southwest noted it is the largest carrier in 23 of the top 50 travel markets in the U.S.
“These operational conditions forced daily changes of an unprecedented volume and magnitude to our flight schedule and the tools our teams use to recover the airline remain at capacity,” according to the statement.
In the following days, it became clear that while bad weather contributed to Southwest’s meltdown, other factors also played a part. Other airlines faced the same weather conditions but had nowhere near the challenges experienced by Southwest. Other factors that contributed to Southwest’s operational disruption included:
- Southwest’s point-to-point network operating model — Most major carriers, including Fort Worth-based American Airlines, United Airlines and Delta Air Lines, operate their networks using a hub-and-spoke model where they station aircraft and crews at certain major airports then run connecting flights in and out of those hubs. For example, American has its largest hub at DFW and major hubs in Charlotte, Phoenix, Miami, Chicago and several others. Southwest uses a point-to-point system where a plane will leave one destination in the morning and fly several segments with more than one or two crews throughout the day. While the model allows Southwest to maximize the use of its planes, it makes the airline vulnerable if challenges arise along the way, such as bad weather in a certain part of the country. “If the crew isn’t positioned in the right spot because of another cancellation, then that flight gets canceled, and connecting flights get canceled,” Mark Duebner, the recently retired aviation director at Dallas Love Field Airport, told WFAA. “It just really spirals downward very quickly. It’s the combination of a perfect storm.”
- Lack of modernization — For years, Southwest has focused on growing rather than investing in the modernization of its technology. During the pandemic, when the airline industry was almost completely shut down, Southwest chose to expand to 18 new destinations and increase operations in Hawaii rather than update its system. Now, the bill appears to have finally come due. Even in today’s age, if a flight attendant or pilot at Southwest gets reassigned to another flight or a different hotel, someone has to call them or chase them down physically in the airport and let them know. Almost everything still has to be done by paper, such as assigning ramp agents to certain zones or aircraft for unloading bags. The presidents of the Southwest Airlines Pilots Association and the TWU Local 556, which represents Southwest flight attendants, have both criticized Southwest management over the last year for not upgrading crew scheduling systems. They have said a lack of upgrades left the airline vulnerable and has contributed to crew fatigue. Even Jordan himself has admitted that a lack of modernization investments has allowed Southwest to fall behind. In an interview earlier this year, he declined to estimate the cost of not modernizing but said it would be a focus for 2023. “As we have grown, we have outscaled and outgrown our tools,” Jordan said. “At our size and scale, that’s just not OK. It’s not only inefficient, it’s hard on our employees. There’s a lot of work to do to catch the tools up to the complexity of the airline.”
- Inexperienced employees — After facing crew shortages in 2021 during the recovery from the pandemic, Southwest ramped up hiring in 2022. The company hired more than 15,000 employees, including adding 11,000 net of attrition. While Southwest needed to get staffed in order to get back to operating at full capacity, it also meant the airline had a less experienced workforce at a critical time.
Where things stand now
Southwest said it returned to normal operations on Dec. 30. The company has promised to reimburse customers for expenses such as hotels and car rentals. Jordan has repeatedly apologized to customers and employees through public statements and interviews on national television.
Customers impacted by a flight cancellation or significant delay between Dec. 24 and Jan. 2 may submit receipts to Southwest for “reasonable requests for reimbursement” for meals, hotel accommodations, and alternate transportation.
Southwest also attempted to further its effort at winning back goodwill from customers on Tuesday by offering 25,000 loyalty program points to those who experienced flight cancellations.
Meanwhile, Southwest’s stock has floundered. Shares of Southwest (NYSE: LUV) have fallen by 9.7% since Dec. 23 to $32.60 as of afternoon trading on Tuesday. Southwest has also lost about $2 billion in value, with its market cap declining from $21.4 billion on Dec. 23 to $19.4 billion as of Tuesday.
Andrew Didora, an analyst at Bank of America, estimated the chaos could cost Southwest between $600 million and $700 million, according to CNBC. Didora’s estimate includes both lost revenue from refunds and reimbursements to affected passengers. He cut his fourth-quarter adjusted earnings forecast for Southwest to 37 cents per share from 85 cents.
Raymond James Analyst Savanthi Syth said in a note that she expects Southwest to take the biggest hit to earnings due to the winter storm but believes the carriers will still generate a “small” profit in the fourth quarter. She estimated the storm would have a negative impact of 62 cents per share on Southwest’s earnings.
The consensus estimate by analysts currently projects Southwest will report earnings of 78 cents per share for the fourth quarter, according to Yahoo Finance.
What happens next
Southwest continues to work on processing reimbursement requests and returning baggage to customers. Jordan said in an email to customers on Tuesday that the company continues to work through those processes “with great urgency.”
And you can expect the federal government to take some sort of action. U.S. Secretary of Transportation Pete Buttigieg expressed concern about what he described as an “unacceptable rate” of cancellations in a letter to Jordan. He said the department will examine whether cancellations were controllable and if Southwest is complying with its customer service plan. Buttigieg has encouraged customers who do not get reimbursements from Southwest to file a complaint with the Department of Transportation.
Some members of Congress have also expressed a desire for further investigation.
Looking further out, Southwest may also have to consider some internal changes. Syth said Andrew Watterson, who took over as chief operating officer of Southwest in September, could look to institute network changes to improve irregular operations recoverability, such as more out-and-back or triangle patterns that returns crews to bases. Slowing growth or reworking the network could put further pressure on Southwest’s unit costs, Syth said.
Southwest will also certainly work on implementing the much-needed upgrades to its technology systems. Information technology firms will surely be lining up to win what should be a lucrative contract from Southwest.