Southwest Airlines melted down over the holidays. They initially blamed weather, but they were cancelling over 60% of their flights a day even while other airlines throughout the country were operating normally. They found themselves short-staffed, and without the systems to recover. Their phone system broke. And they had to rebuild schedules manually, getting in touch with crews one at a time. And this went on for a week.
The airline has described ‘millions’ of passengers effected, though the number is over a million and likely around two million. The costs to the airline are staggering, and they are now expecting to lose money for the fourth quarter of 2022 as a result of lost revenue (they didn’t earn ticket revenue for the flights they cancelled) and higher expenses (reimbursing and compensating passengers).
Just how big of a deal was this? Rough back of the envelope I’d estimated that the event could cost Southwest order of magnitude $1 billion. The airline is now saying it will cost them a total of “$725 million to $825 million.”
As a result of the operational disruptions, the Company currently expects to report a net loss in fourth quarter 2022, driven by a preliminary estimated fourth quarter 2022 pre-tax negative impact in the range of $725 million to $825 million. A significant portion of this impact is from an estimated revenue loss in the range of $400 million to $425 million.
The remaining impact relates to an estimated net increase in operating expenses, primarily due to estimated travel expense reimbursements to Customers, the estimated value of Rapid Rewards ® points offered as a gesture of goodwill to Customers that are expected to be redeemed, and premium pay and additional compensation for Employees, which was partially offset by lower fuel and oil and profitsharing expenses.
The components of cost to the airline:
- $400 – $425 million in lost revenue
- $325 – $400 million in reimbursements and compensation
The airline has to provide refunds for cancelled flights, though some passengers will wind up with travel credit. Those credits no longer expire, but the revenue isn’t earned until flown in any case.
It’s difficult to know how many people will seek reimbursement, and for how much money. Southwest Airlines has said they’ll cover reasonable expenses for hotel, meals, and alternate transportation. People stuck for days in modest hotels could rack up large bills, and anyone able to find a flight over the holidays at the last minute – when they were competing with thousands of other people for very few available seats – would have paid a huge premium. But a majority of passengers probably won’t pay enough attention or jump through the hoops of submitting receipts.
Southwest has been sending out 25,000 Rapid Rewards points to people affected by disruptions. At first it seemed like they would only provide points to people that had trips cancelled and did not rebook. Then it was extended, including to passengers who were delayed. I was told a three hour delay was needed to receive compensation, but I received 25,000 points after just slightly over a one hour delay waiting for a flight attendant. My wife (companion) and daughter (points redemption) did not receive codes, though others report that companions and redemption tickets being compensated.
Then how many of those Rapid Rewards points will be redeemed through the points.com branded portal? Many of the emails won’t be noticed, many customers won’t go through the steps to redeem the codes. And just because a code is entered doesn’t mean you’ll get the points! After a few hours my own submission was rejected, for no stated reason. (I suspect the volume of compensation simply overwhelmed points.com and Rapid Rewards.) I submitted the code a second time and points posted.
All of these figures are estimates at this point, sensitive to the number of passengers who take steps to claim compensation in amounts that are mere guesses though based on projections of data the airline has from early claims. $150 million is not a small variance!
The business press has the total cost of WN’s meltdown to the airline up to $850 million.
It would be interesting knowing how much increased revenue other airlines gained selling the few remaining seats available at higher prices.
They will just raise fares 5% and devalue their points a little (since giving away points for the disruption). I bet they take a one time hit (which may be partially reserved) and make it up within a year
A more important question to ask is what is the net effect on cash flows?
It’s pretty easy to “enhance” or “minimize” balance sheet and income statement numbers but cash flows, not so much.
While I doubt the net cash flows number will be so newsworthy as the accounting net income (loss), I’d expect it to be pretty bad given the loss of cash ticket revenue and cash compensation payments to affected passengers.
Likely not the best time to be drawing on credit facilities with high and rising interest rates and I’m sure this meltdown, on top of others in the last couple of years, won’t give WN preferred credit access and that can be a major problem for airlines.
The government should not give them a penny. Airlines are for profit businesses and SW leadership can operate a profitable, safe and effective business or they cannot.
…….Never mind the fines that Buttigieg and company will levy, and that ought to be substantial!
Spelling…”The airline has described ‘millions’ of passengers effected, ” The correct spelling is “affected”.
these numbers are very much in line with the amounts I mentioned on this site even before the disaster ended.
LUV will handle this because they have one of the best balance sheets in the industry but they have an enormous reason to get their processes and IT fixed now.
Wiping out a quarter’s profits and reducing the year to one of the laggards of the industry financially is not the way to run any airline but esp. not LUV.
It’s the stingy man who pays the most. $800 million would have paid for a vast improvement in IT services.