Southwest Airlines could face a roughly $500 million revenue hit from its meltdown during the year-end holiday season that resulted in thousands of cancelled flights and disrupted trips.
Raymond James analyst Savanthi Syth has estimated that the flight cancellations and operational distress could reduce revenues by about 9 points in the fourth quarter. That works out to as much as a $515 million decrease in revenues from the meltdown based on Dallas-based Southwest’s revenue outlook in December. Another analyst put the potential hit at roughly 5 percent of forecast revenue or, based on the same guidance, a roughly up to $335 million reduction.
Southwest cancelled 15,004 flights from December 22-29 before returning to normal operations on December 30, according to FlightRadar24 data. While weather was the precipitating factor, a lack of investment in backoffice technology is widely blamed for the meltdown.
“Our desire is to go above and beyond,” Southwest CEO Bob Jordan said on Good Morning America on December 30, regarding how the airline plans to make travelers whole. That would include, he added, refunding tickets and covering disrupted travelers’ rental cars, hotel rooms, meals, and tickets booked on other airlines.
The full cost of all of that — the refunds, rental cars, flights, hotels, plus all the expenses incurred in Southwest’s own business, like repositioning crews and planes — will be steep and take time to fully calculate. Southwest will likely release a number before its scheduled 2022 earnings call on January 26.
The revenue reduction estimates, while steep, do not include the added cost of reimbursements and other expenses incurred from the situation. Estimating those is more difficult as it depends on what people had to pay for hotels, rental cars, and other flights — all of which were likely expensive due to it being peak holiday season travel — and what they submit for reimbursement.
One traveler, aviation journalist Zach Griff, whose flight between Kahului and Kona in Hawaii was canceled during the disruptions, tweeted that in addition to receiving a refund of $39 for his ticket, Southwest reimbursed a $149 ticket he had to buy on Hawaiian Airlines to get to his destination and gave him a $250 voucher. In other words, the airline paid Griff more than 10-times what he initially paid for his ticket.
While not every traveler is likely to receive a 10-times their airfare payout, Griff’s experience suggests the added costs for Southwest could exceed the revenue hit from the meltdown several times over.
“We are going to be putting Southwest Airlines under a microscope in terms of their delivering these kinds of reimbursements and refunds to passengers,” Secretary of Transportation Pete Buttigieg said on the Today show on December 30.
Buttigieg, in a video posted to Twitter on December 29, also said that where Southwest does not refund and reimburse travelers where it is obligated to, the Department of Transportation would “penalize Southwest, as we would any airline, to the tune of potentially tens-of-thousands of dollars per violation.”
DOT penalties are rarely material for airlines. In 2022, the agency assessed over $8 million in total penalties, which it touted in November as “the largest amount ever issued in a single year.” Southwest, for perspective, made $6.2 billion in revenue in the third quarter of 2022 alone.
And, finally, there is the lingering fallout among consumers from the meltdown. Many are likely to harbor some ill-will towards Southwest for some time to come. Syth from Raymond James expects a hit to Southwest revenues in the first quarter as travelers book elsewhere, and that the situation will moderate in the second quarter.
Southwest “will recover,” wrote Marty St. George, the commercial chief at Latam Airlines Group and a former long-time JetBlue Airways executive that worked at the airline during its own operational disaster in 2007, tweeted on December 28. “It will mean a lot of work, a lot of IT, and a lot of soul searching but [Southwest] will recover.”