Southwest’s Meltdown Will Cost Up To $825 Million

Southwest Airlines estimates that its terrible, horrible, no good, very bad holiday meltdown will cost the carrier between $725 million and $825 million and result in a net loss for the fourth quarter.

That’s a painful reversal from October, when Southwest CEO Bob Jordan predicted the airline would “generate strong profits and margins in fourth quarter.”

In a Securities and Exchange Commission filing last Friday, Southwest reported that the nearly 17,000 flights it canceled in the last 10 days of December resulted in between $400 million and $425 million in lost revenue.

On top of that, the carrier is also on the hook for reimbursements to passengers for expenses such as hotels, transportation, meals and lost luggage, not to mention the value of the 25,000 Rapid Rewards points — worth about $300 per passenger — that the airline is providing as a peace offering to customers whose flights were either canceled or delayed by more than three hours.

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The true cost of the debacle will likely trickle across future quarters, however, as many reimbursements and rewards points will not be recorded as expenses until they are processed and redeemed.

Southwest is also facing a class action lawsuit from a passenger who claims the carrier did not refund his tickets for canceled flights during the holiday period.

The airline’s meltdown has some lawmakers pointing to a need for stronger consumer protections. In a letter last Thursday to Transportation Secretary Pete Buttigieg, a group of 26 House Democrats urged him to use “the full weight” of the agency to hold Southwest accountable. “Unless immediate action is taken, the rising threat of mass flight cancellations risks jeopardizing Americans’ confidence in the reliability of our nation’s air transportation network,” the legislators wrote.

Meanwhile, in the Senate, Commerce Committee chair Maria Cantwell said the members would be “holding hearings for FAA reauthorization to examine how to strengthen consumer protections and airline operations.”

Just before Labor Day weekend, the Department of Transportation launched a dashboard showing a side-by-side comparison of each airline’s cancellation and refund policies, a transparency-driven move that pushed some airlines to modify their policies to make them more consumer-friendly.

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Typically, reimbursement policies depend on whether an event was caused by factors within an airline’s control — for example, a technology glitch, understaffing or an equipment malfunction — or by factors outside of its control, like weather.

While Southwest’s holiday disaster was initially thought to be a weather-related incident, it soon became apparent that other major airlines were not experiencing anywhere near the same level of flight disruptions. Southwest’s systemwide failure has since been blamed on a failure of the airline to update its outdated flight scheduling software.

In a scathing statement released on New Year’s Eve, the Southwest Airlines Pilots Association, which is locked in contract negotiations with the carrier, blamed the mess on former CEO Gary Kelly, whom it called a “fantastic accountant” whose “lack of strategic vision beyond a singular focus on increasing revenue” led to a “headquarters-centric cult” of “yes-men and yes-women” who were promoted “based on agreeability rather than competence.”

“Gary’s vision was to become the darling of the investment community … where all decision-making authority was slowly stripped from front line experts with the most situational awareness,” said the letter signed by the union’s vice president. “During Gary Kelly’s tenure as CEO, Southwest Airlines has returned approximately $12 billion to shareholders while increasing his own total annual compensation by more than 700%.”

Bob Jordan took over as CEO just under a year ago, following Kelly’s retirement from the position. Kelly remains the airline’s chairman.

The share price of Southwest Airlines rose 6% in the last five days but is down 3% over the past month and down 22% over the past year.