Southwest Airlines’ holiday meltdown could cost the company $825 million, according to a new SEC filing. In the final 10 days of 2022, the airline canceled more than 16,700 flights. It now expects a net loss for the final quarter of last year.
Los Angeles, CA – December 28: Not very busy Southwest terminal after it cancelled more than 2,500 … [+]
About half of the impact ($400 to $425 million) is from lost revenue. Other components include travel expense reimbursements to customers and the estimated value of frequent flyer points offered to affected flyers. Southwest promised 25,000 Rapid Rewards points to flyers whose flights were disrupted.
Despite the massive number of cancellations, employee expenses will also be higher due to premium pay and other compensation for Employees. The sole bright spot for the airline’s financials was that the higher costs will be partially offset by lower fuel and oil and profit-sharing expenses.
“Pay me now, or pay me later”
Back in the day when it made sense to advertise car maintenance products on television, there was a long running campaign for Fram oil filters that always closed with the tagline, “The choice is yours. You can pay me now… or pay me later!”
The point of the campaign was that a regular small investment in oil changes with a quality filter would prevent a much greater expense later. One ad showed a mechanic rebuilding an engine on a bench, saying “I’m expensive!” Another ad shows a car being crushed in a junkyard.
There’s a lesson for Southwest in that tagline. Their lack of investment in their back-end operations has now cost them nearly a billion dollars.
Technical Debt
It’s clear that Southwest had failed to update aging, creaky IT systems that ran critical parts of the business, particularly crew scheduling. The pilot’s union had been warning about the potential for serious problems for years. (How often do you see unions making IT infrastructure part of their bargaining demands?)
For years, when the system became overwhelmed, the company and its crew members had to fall back on manual methods to keep things running. In December, the combination of severe weather and the number of flight changes overwhelmed both systems resulting in a complete collapse.
Investing in software and systems that aren’t directly visible to the customer isn’t sexy. You don’t see many press releases touting investments that do little more than maintain the status quo. Of course, this isn’t a Southwest-only phenomenon. Underinvestment in IT systems is so common it’s earned a name: “technical debt.”
Don’t Blame a Lack of Resources
Southwest had the financial ability to invest in their systems. Last June, they announced a $2 billion investment in aircraft upgrades that would accommodate more carry-on baggage, offer faster WiFi, and expand entertainment options. Clearly, that money might have been more wisely allocated to keeping the basic service running.
Southwest also resumed paying a quarterly dividend to shareholders just weeks before the meltdown. At that point, they predicted revenues could be up by as much as 17%. Instead, they saw seat-mile capacity decline by 6% for the quarter and incurred the 400+million revenue hit.
In the years leading up to the pandemic, Southwest spent $5.6 billion on share buybacks. Their 2023 plan called for $4 – 4.5 billion in capital spending, but primarily for new aircraft. The question was never a lack of resources, but rather how to allocate them.
The Lesson for Us All
Few companies will ever experience a systems failure as massive or, thankfully, as public as what Southwest has gone through. But, many companies DO make the same mistake. They put off spending on things that impact both customer experience and employee experience. These expenses get pushed into the future, and in the meantime customers and employees suffer. Sometimes, improvements only happen when things reach a breaking point.
Southwest waited too long and has now suffered a huge financial and reputational impact. The rest of us need to take the oil filter guy’s message to heart: “You can pay me now, or pay me [a lot more] later.”
