Over the holidays, Southwest Airlines suffered an operational meltdown unlike ever before, as the airline canceled a total of 16,700 flights, and delayed thousands of additional flights. We knew this would be costly for Southwest, but we now have some numbers.
In this post:
Southwest Airlines will report Q4 2022 loss
Southwest Airlines has revealed that it anticipates reporting a loss for the fourth quarter of 2022, due to the operational meltdown.
The airline was initially expecting that capacity for the quarter would be down 2% compared to the same period in 2019, while it ended up being down 6%. So yeah, those cancelations in the last 10 days of the year caused capacity for the entire quarter to decrease by 4%.
The company is expecting the pre-tax negative impact of the meltdown to be in the range of $725-825 million. Here’s how that breaks down:
- Southwest expects a $400-425 million revenue loss due to canceled flights
- Southwest expects a $325-425 million loss due to an increase in operating expenses, including needing to reimburse travel expenses for customers, the estimated value of Rapid Rewards points offered as a gesture of goodwill (the airline offered people caught in the mess 25K points each, worth roughly $300 in airfare)
- There were also costs associated with premium pay and additional compensation for employees, but this is largely being offset by lower fuel and oil costs, as well as lower profit sharing expenses
My take on Southwest Airlines’ loss from the meltdown
I find the math here to be interesting. Let me start by acknowledging that all of the numbers here are quite fuzzy — we don’t know what load factors were, we don’t know how many people ended up rebooking rather than just canceling their flights, and we don’t know how much reimbursement people will seek.
Just to do some very basic math, let’s assume there were an average of 150 people booked on each of the 16,700 canceled Southwest flights. That means a total of 2.5 million passengers ended up on canceled flights.
The $400-425 million revenue loss for canceled flights roughly adds up, as it suggests that the average per-segment fare was around $160. That sounds about right, when you consider that some people were taking a single flight, while others were connecting.
If anything, I’m surprised there’s “only” an estimated $325-425 million loss from everything else. I would have assumed that the reimbursement and compensation would exceed the revenue loss.
Admittedly there’s not much precedent for something like this, but:
- Southwest offered 25K Rapid Rewards points to each traveler impacted by the mess, and those points are worth roughly $300; clearly the airline thinks many people won’t request these points or use them
- Given the cost of last minute airline tickets for stranded travelers, I’d think that the reimbursement for cancelations could be way more than people initially paid in airfare for Southwest
I think it will be quite some time before Southwest knows the total cost of this mess. Personally I wouldn’t be surprised if it’s a bit higher than the upper range of the current estimate, since I think a lot of people will be requesting a lot of reimbursement, given the pressure that the Department of Transportation is putting on the airline. There’s not really precedent for this, and it will likely be many weeks before Southwest responds to all complaints.
Bottom line
Southwest Airlines has revealed that it expects to report a loss for the fourth quarter of 2022, as the meltdown is anticipated to cost the airline $725-825 million. A bit over half of that is estimated to be due to lost revenue from canceled tickets, while the balance is estimated to be due to customer reimbursements, plus bonus Rapid Rewards points issued as a gesture of goodwill.
What do you make of Southwest’s anticipated loss from the holiday disaster? Is it higher or lower than you expected?
Technology issue, my foot. What they're not saying is the employees are actually striking over ridiculous COVID policies.
In six months, those not aligned in a rewards program will forget the meltdown while searching for the cheapest ticket.
It will be swept under the carpet as a footnote in the quarterly and year end financials of LUV as a cause/benefit expenditure for a new software package and all will be forgiven.
@Exit Row Seat -
Except WN flights aren’t sold on any online travel sites, only southwest.com. So anyone searching will have to specifically go to Southwest’s website and if they do that then they’re willingly taking a chance by seeking out WN flights specifically.
These numbers are very much in line w/ the damage estimates I wrote about on this site and elsewhere even as the disastrous operations were still unfolding.
LUV has every reason to get their problems that caused this fixed
@Tim Dunn
While you're out there giving estimates, maybe you should disclose you positions on LUV and anything related. SEC read blogs too.
Unfortunately, most of the people responsible will never pay a dime for this, except shareholders. Bob Jordan is the current CEO but only since 2/1/22. Decades of neglect caused the meltdown. The people responsible for making those decisions have likely moved on (with performance bonuses) because their quarterly profits were up.
What counts in the "loss" (and when it is recognized) will depend in part on various accounting rules. So accounting loss vs. actual financial impact aren't quite the same.
The crazy thing is: the exact same thing can happen next month or even next week, with another severe winter storm.
They're still comparatively limited by their IT system. Still limited in moving the masses due to lack of larger gauge, or the ability to reorganize their ops/placement overnight to the same extent other carriers can.
Nothing's changed, nor can really be expect to, near term.
What ever accounting WN uses, if past airline reimbursement policy is any predictor of the current situation, WN will end up losing a lot less than what the passengers collectively lost. I have never been made whole when airlines have screwed up during my decades of air travel.
I’d also be shocked if the DOT does not issue fines in the coming months along with issuing certain mandates (I.e. a business plan with action steps to prevent another meltdown in the future). Their IT department is going to get a nice budget boost in 2023 for sure. When all is said and done the total loss will probably creep above $1 billion.
Just like with the free points, I assume there will be a lot of "breakage" with reimbursements. How many won't bother, or just abandoned their trip (never started it and just stayed home) and have no expenses they can really report, or won't follow up with the appropriate documentation, etc.
Also, presumably expenses on a per-person basis become lower for groups traveling together - a family of 4 could rent one car, one hotel...
Just like with the free points, I assume there will be a lot of "breakage" with reimbursements. How many won't bother, or just abandoned their trip (never started it and just stayed home) and have no expenses they can really report, or won't follow up with the appropriate documentation, etc.
Also, presumably expenses on a per-person basis become lower for groups traveling together - a family of 4 could rent one car, one hotel room, etc. Only food would be proportional. So, totally making this up here, but if the average traveling group over the holiday was 2 people, then that would probably cut the number of potential claims in half.
I wonder if they will recover some of the loss by not paying the executive team their bonuses, I doubt it.
Not an accountan, but wouldn't some (most?) of the reimbursement expenses be for 1Q23?
An estimate of the future costs gets recorded in 2022, since the actual cause of those costs (their massive cancellation meltdown) happened in 2022.
Why is there a United plane shown in this article?
Maybe to represent the "other airlines" that people had to rebook?
Just remember every other US airline is primed for a similar meltdown. They all are trying to operate with packed to the gills flights, less ground resources available for rebooking/rerouting, and systems that can't handle an overload. We will see this played out again.
Yes and No.
Being lowcost by design, Southwest had a system that couldn't handle a meltdown of this magnitude and took them days to even restart.
Yes it could happen to AA DL UA, but when major airlines gets hit, they recover much faster.
Another difference is the leadership. How Southwest management deals with the problem in the early days leading to the total meltdown, their internal memo says it all.
Hardly.
The other carriers are no saints, but there's plenty of difference between their capability to recover from something like this versus Southwest's... most notably their ability to swap significant gauge, and to reset overnight: two things severely limited by WN's ridiculously primitive IT capabilities.
This meltdown has also damaged their brand and will result in more losses
I agree with Kendall - I suspect that the true loss will be in the value of their brand. By all accounts - LUV worked has hard to build to build their brand name over the years. But if you were one of those 2.5MM people on those canceled flights - would you be looking to fly anywhere with them in the future?
I had several bad experiences on United about 20 years ago,...
I agree with Kendall - I suspect that the true loss will be in the value of their brand. By all accounts - LUV worked has hard to build to build their brand name over the years. But if you were one of those 2.5MM people on those canceled flights - would you be looking to fly anywhere with them in the future?
I had several bad experiences on United about 20 years ago, and walked away swearing I would never fly another United flight. At the time, I was a United million miler - and left nearly 1 million frequent flier miles still in the "bank" (looking back - I acknowledge that was foolish!).
People have a long memory when you let them down.
Spirit and Frontier don't treat their customers well, but people keep coming back. Flying for most on a low cost airline is just a commodity product. People will often just book the lowest fare. If that is Southwest, they will fly it. Especially now with some flight credits to be used.
Oh, nice Southwest got a Dreamliner.
Haha…Ben just needs his coffee.
@ Eli -- Sorry for any confusion, that wasn't intended to be a mistake. The caption is "Southwest is reimbursing travelers who had to book on other airlines," and I decided to post a picture of a plane belonging to another airline (since presumably some people rebooked on United).
Southwest doesn't have a particularly varied fleet, so always posting the same Southwest plane pictures gets a bit boring, hence me switching it up.
@Ben but the seat jacket emergency cards say Southwest