Southwest’s strong rebound in 2022 overshadowed by holiday rout

Southwest Airlines expects a loss-making fourth quarter after a winter storm and technology crisis caused nearly 17,000 flights to be canceled and hundreds of thousands of holidaymakers stuck.

The cancellations will result in a loss of between $725 million and $825 million before taxes due to lost profits plus additional costs, including travel reimbursements and employee pay raises, Southwest said Friday in a regulatory report.

The storm and slow recovery was a devastating financial and reputational turnaround for the Dallas-based carrier, which turned a profit for all U.S. airlines during the first nine months of 2022, a year of recovery for the pandemic-hit aviation industry.

Mass disruptions began with a winter storm that hit much of the country before Christmas. They snowballed when Southwest’s outdated crew planning technology was overwhelmed, leaving crews and aircraft unable to fly. Managers and a staff of volunteers at the company’s 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 holiday, while other major airlines quickly reopened after the storm passed.

Southwest said in a filing with the U.S. Securities and Exchange Commission that it canceled more than 16,700 flights between Dec. 21 and Dec. 31, resulting in $400 million to $425 million in lost revenue. In early December, before the crisis, Southwest forecast fourth-quarter revenue to rise 17% from the same period in 2019, before the pandemic.

The airline said the costs had increased due to cash refunds to customers – the company has promised to cover “reasonable” bills for hotel rooms, meals and alternative transportation – along with the estimated value of the frequent flyer points it offers. customers, as well as allowances and additional employee compensation.

Just last month, Southwest announced that it would resume paying dividends to shareholders, which were suspended after the pandemic devastated the aviation industry in early 2020. The airline estimates that it will pay $428 million to shareholders this month. U.S. airlines were barred from paying dividends or buying back their own shares until October as a condition of receiving $54 billion in federal pandemic relief. Southwest has received over $7 billion in aid.

Since resuming normal schedules on Dec. 30, Southwest’s flight cancellations and delays have dropped sharply, about the same as other major US airlines. The company is working to restore its damaged reputation.

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

Jordan said the company spends about $1 billion a year on technology and tests how systems work before making decisions about prioritizing IT spending.

Company officials dispute union leaders’ claims that the company has not invested enough in technology upgrades, although they acknowledge that crew planning systems have not received as much attention as other IT spending, including aircraft maintenance operations.

“You could criticize us for prioritizing ground operations and technical operations over crew actions in the beginning, but at the time it seemed like the right course of action. It obviously bit us in retrospect,” Chief Operating Officer Andrew Watterson said last week, “but there has been a lot of modernization work going on.”

Shares of Southwest Airlines Co. fell in the first few days of the crisis, but remained virtually unchanged during trading on Friday morning.

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