Southwest Airlines Faces Up to $825 Million Loss Due to December Disruption

Southwest Airlines Co. is a major airline company headquartered in the United States. It is the largest airline company in the world by number of passengers carried.

On Friday, the company said that it expects its holiday meltdown to wipe out fourth-quarter profits. This is 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 impact from reimbursements to affected travelers, premium pay for employees and other related costs.

A severe winter storm swept across the country before Christmas, initially knocking Southwest off course. However, the airline struggled to right itself even as rivals recovered within a few days. Southwest 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 more and more cancellations came in, the airline had to cut back its schedule by nearly two-thirds for three days last week. This was done in order to give the airline a chance to reset before returning to normal operations on December 30th.

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. This was a positive sign for the company, as it showed that they were bouncing back from the pandemic which had decimated travel demand.

Now the airline is facing questions about whether it waited too long to make necessary investments in new technologies.

Airline executives have acknowledged that some of Southwest's systems haven't kept pace with the airline's growing size and complexity, and have said that modernizing aging technology would be a priority in the coming years. However, union officials have said that these investments haven't come swiftly enough. The Southwest Airlines Pilots Association has cautioned throughout the past year that a bad storm could easily push Southwest's operations into disarray.

Bob Jordan, the airline's chief executive, said that the company spends about $1 billion a year on technology. However, the recent disruptions have prompted the airline to re-examine its plans and potentially accelerate some of its investments.

He said in an interview Thursday that they want to look at everything in order to mitigate the risk of this happening again. This includes their processes, technology, systems, and activation.

Southwest has acknowledged that its problems have disrupted travel for millions of people, and has said it will provide refunds and reimbursements for "reasonable" expenses such as hotel rooms, rental cars and fares on rival airlines. It has also been doling out awards of 25,000 frequent-flier points to affected travelers, which the airline has said is equivalent to about $300. This is in addition to the cost estimate released Friday.

Southwest enlisted volunteers from other departments to help process refunds and work through the backlog of missing baggage. In some cases, baggage was shipped by FedEx or UPS.

On Thursday, Mr. Jordan said that approximately 95% of the missing bags had been returned to their owners or were en route, and that the airline had processed around 75% of refund requests. He added that the airline had hired an external company to assist with reviewing requests for expense reimbursement.

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 by 0.8% on Friday morning, after falling earlier in the day.

A smaller disruption in October 2021 cost Southwest Airlines about $75 million, including refunds and gestures of goodwill to customers. Spirit Airlines 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 caused by a computer glitch resulted in a $150 million reduction in Delta’s pretax profits, the airline said at the time.

The recent problems at Southwest Airlines have caught the attention of the Biden administration and drawn criticism from union officials.

Pete Buttigieg, the Transportation Secretary, has said that he is keeping a close eye on how Southwest handles refunds. Some lawmakers have been pressuring the Transportation Department to take more action.

More than 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 that Southwest is currently conducting a review in order to gain a better understanding of what happened and to identify any necessary changes. He also mentioned that Southwest has engaged its unions in this process.

He said that the work would be done very quickly.