Southwest Airlines Vows to Return to Recovery Plan by March After Meltdown
Two months. That’s how long Southwest Airlines expects there to be an impact on bookings from its massive holiday meltdown that disrupted millions of travelers over Christmas and New Years.
The Dallas-based carrier forecasts a $300-350 million hit to revenues as a result of the meltdown in January and February, it disclosed in its fourth-quarter results Thursday. That is on top of the roughly $800 million hit it took in December. But, by March, executives are confident that the fallout — at least on its earnings statement — will be fully behind it.
“I think we’re going to be very pleased with the [financial performance in the month of March,” Southwest Chief Commercial Officer said during the airline’s earnings call Thursday. “It feels like we’re, kind of, back on plan.”
That’s pretty remarkable considering the magnitude of the disruption that began on December 21 and continued through New Years Eve. Southwest canceled more than 16,700 flights or, put another way, nearly 40 percent of its schedule over that 11 day period. That, based on back of the notebook calculations using its average of 83 percent of seats filled during the fourth quarter, equals as many as 2.2 million affected travelers (the actual number may be lower because some travelers are connecting on two or more flights).
Put another way, the number of travelers impacted by Southwest’s meltdown was equal to the population of the Kansas City metro area.
“I’m not proud of what happened,” Southwest CEO Bob Jordan told investors on the call. He apologized again for the meltdown and then, along with Chief Operations Officer Andrew Watterson, detailed all the steps the carrier has and is taking to ensure a comparable meltdown does not happen again at Southwest.
While severe winter storms were the initial catalyst for Southwest’s meltdown, it was its crew scheduling software — SkySolver provided by supplier GE Digital — that was unable to keep up with the situation and prompted the multi-day reset of the airline. Watterson said upgrades to allow the system to keep up with a dramatic spike in crew rescheduling events have already been made by GE, and are currently being tested.
In addition, Southwest has taken a number of other steps to ensure a similar meltdown will not happen again. These include a new early warning system of any potential spike in the number of crew and aircraft that need to be rescheduled; new crew communications tools; more crew scheduling staff; and a full review of the airline’s cold-weather operational preparedness. In addition, Southwest has engaged advisors Oliver Wyman to do a full review of the meltdown and its causes; Watterson said they expect the report “soon.”
One area where Jordan and his team were on the defensive was on technology investment. In response to analysts’ questions over potential underinvestment, he said: “We invest a lot in technology … There’s been no lack of investment.” Jordan went on to describe the investments as a “journey,” where there is a constant need to make upgrades as the airline grows increasingly complex. Southwest will invest roughly $1.3 billion in technology this year, up from about $1 billion in 2022.
“At the end of the day, that kind of disruption cannot happen again,” Jordan said.
Expansion Plan Continues
Southwest’s schedule recovery and growth — it will surpass 2019 flying levels this year — continues unabated in 2023. System capacity will increase roughly 10 percent year-over-year in the first quarter, and 16-17 percent for the full year. The full-year number is at least one point higher than the airline’s previous guidance owing to year-over-year comparisons to the holiday meltdown.
Jordan and other executives emphasized that the operational chaos in December was no reason to put Southwest’s growth plan on hold. Travel demand is robust with the exception of January and February. And managed corporate travel, a key indicator of the economic recovery, is expected to hit 2019 levels by March; it was at 80 percent of three years ago in the fourth quarter.
And Southwest is ahead on its hiring plan. The airline saw a net headcount increase of 11,000 staff in 2022, which Jordan said was more than its target. It plans to add another net 7,000 staff this year. Pilot hiring, however, will step up with the airline seeking roughly 1,700 new cockpit crew members compared to 1,000 last year.
Jordan and other executives did not comment on Southwest’s use of temporary staff, including for ramp positions. This was reported to be among the initial causes of its weather-related cancellations during the holidays that cascaded into its full meltdown.
Almost all of the carrier’s growth this year will go into restoring the depth of its network. When the pandemic hit, the first thing to go were the multiple daily flights Southwest offered on key routes — for example, the Los Angeles-Phoenix route had eight daily flights where today it has five — those lost frequencies will come back this year. In addition, it plans significant growth in several key cities, including boosting Baltimore-Washington to more than 220 daily departures and Denver to more than 300 departures by July.
The growth in Denver comes after the airport opened a 16-gate extension of Southwest’s concourse for the airline last year. The Baltimore-Washington airport is also investing in new terminal facilities for Southwest.
Southwest’s capacity growth forecast “could be a cause for future concern given the severe operational issues previously experienced in their network over the holiday season and in the months prior,” Cowen & Co. analyst Helane Becker wrote on the carrier’s outlook Thursday.
While her comments came before Jordan and other executives commented on their plans, Becker raised a key concern among both investors and travelers about Southwest’s outlook. Namely, whether the airline is actually able to fly the full schedule it sells. This was something United Airlines CEO Scott Kirby highlighted in his takedown of the airline industry’s capacity forecasts earlier in January.
Jordan and his team were clear in their remarks: Southwest was staffed and ready to operate its full schedule over the holidays. It was only the weather, and the inability of its scheduling system to keep up with the amount of changes, that led to the meltdown.
Ultimately, though, that is not for Southwest to decide. The U.S. Department of Transportation has launched an inquiry into the carrier’s scheduling practices, and whether it was selling more than it could reasonably operate over the holidays — meltdown aside.
“DOT is in the initial phase of a rigorous and comprehensive investigation into Southwest Airlines’ holiday debacle that stranded millions,” an agency spokesperson said. The “DOT is also probing whether Southwest executives engaged in unrealistic scheduling of flights which under federal law is considered an unfair and deceptive practice.”
Transportation Secretary Pete Buttigieg has been critical of Southwest’s handling of the meltdown, describing it as “unacceptable” in December. He has promised to use the full weight of the DOT to ensure the carrier refunds tickets and reimburses travelers for all eligible expenses. Legislators in both the House and Senate have also called for answers, and said they plan to hold hearings on the situation.
Any potential action or penalties against Southwest could extend the period where the airline feels the financial burden of its meltdown well beyond February.
And the Numbers
Southwest lost $220 million in the fourth quarter after the roughly $800 million meltdown hit. Revenues increased 7.7 percent compared to 2019 to $6.2 billion but expenses ballooned nearly 30 percent to $6.6 billion. Revenue per available seat mile, a measure of how much the airline makes per mile it flies, increased 14.9 percent from three years earlier, while costs per available seat mile excluding fuel and special items jumped nearly 45 percent. Southwest flew 6 percent less capacity in the fourth quarter than it did in 2019.
And for the full year, Southwest posted a $539 million net profit. Revenues increased 6 percent compared to 2019 to $23.8 billion. Revenue per available seat mile was up 12.5 percent, and costs per available seat mile excluding fuel and special items by more than 22 percent.
Looking ahead, Southwest anticipates a 20-24 percent increase in revenues in the first quarter compared to last year. Unit costs excluding fuel and special items are forecast to increase 2-4 percent; the metric is forecast to drop 6-8 percent for all of 2023.
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