Southwest CEO plans recovery after holiday crisis

Travelers at Baltimore Washington International Airport are grappling with the impact of Southwest Airlines’ December 27, 2022 cancellation of more than 12,000 flights around the Christmas holiday weekend across the country and in Baltimore, Maryland.

Michael McCoy | Reuters

southwest CEO Bob Jordan’s message after a vacation crisis wrecked the travel plans of millions is clear: “I can’t say it enough. We screwed it up.”

Jordan is now focused, he told CNBC in an interview, on making sure a similar crisis never happens again. The airline has hired consultancy Oliver Wyman to review its processes, interview employees and union members, lay out what went wrong and determine how to avoid it in the future. The low-cost airline cooperates General Electric to enhance the capabilities of software that assists Southwest in drafting crew reassignments. And the airline’s board has set up an audit committee to help managers deal with such events.

The event was disturbing for many travelers who were used to Southwest’s customer service, which includes policies like free checked baggage, a rarity for domestic travel to the United States. Lawmakers and Transport Secretary Pete Buttigieg said they wanted to investigate the disruptions further.

The Department of Transportation is in the early stages of an investigation into the airline’s holiday turmoil and “is also looking into whether Southwest executives were involved in unrealistic flight schedules, which is considered an unfair and deceptive practice under federal law,” a spokesman said Wednesday.

After less than a year at the airline’s top position, following a travel chaos he had not seen in his more than three decades with Southwest, Jordan is now tasked with making things right with passengers and employees.

“We took goodwill out of the bank. We know that,” Jordan told CNBC. “We have a lot of work to do to restore trust, but our customers are very loyal and we see that loyalty.”

Southwest said it offered bonus payments to flight attendants and $45 million in “gratitude payments” to pilots because of the meltdown. Both groups have been warning of inadequate technology and scheduling for years.

The airline has also given away 25,000 Rapid Rewards points each, which the company estimates to be worth about $300, to about 2 million people who booked flights during the chaotic holiday season, Jordan said.

He said a recent fare sale was successful and that many customers are redeeming frequent flyer points for Southwest flights.

Southwest said the mess will likely mean a $725 million to $825 million in damage to pretax earnings and a rare quarterly loss. Executives will face questions from analysts and reporters when the airline reports earnings, which are scheduled for Thursday morning.

A Southwest spokeswoman told CNBC on Wednesday that the airline’s planned resumption of a quarterly dividend will go ahead as planned on Jan. 31

Cascading cancellations

Southwest said it canceled about 16,700 flights between Dec. 21 and Dec. 31, a tally that swelled after it didn’t recover from severe winter weather that hampered travel across the country and stabilize days later. Airline executives had expected it to be the busiest travel time since the start of the Covid-19 pandemic.

The hydraulic fluid became so viscous in the brutal cold that jet bridges could no longer be moved. Snow and high winds suspended operations at airports across the country. Airplane engines iced up.

Most airlines had largely recovered from the bad weather by Christmas Day, but Southwest’s problems worsened when crews had to call to get new orders or hotel rooms, prompting a backup.

The airline’s planes and crews were left out of place and at the mercy of crew planning systems designed to handle current or future flight disruptions, rather than an accumulation of past flight changes.

“We needed a bigger response to reset the network,” Jordan said. “That basically dragged the schedule down.”

Southwest only flew about a third of its scheduled schedule for several days after Christmas to get crews and planes where they needed to go.

“The GE Digital tool integrated with Southwest’s systems performed as planned throughout the event and we are working with them to define new functionality as they improve their crew rescheduling ability,” said a GE spokesman on Tuesday.

Nevertheless, the planning chaos after bad weather is nothing new for the airline industry. JetBlueThe February 2007 meltdown cost JetBlue founder David Neeleman his job. (He has since started a new airline in the US called Breeze Airways.)

Southwest itself had a minor cascade of flight disruptions in October 2021 that cost it around $75 million. months before, Spirit Airlines suffered $50 million damage from mass disruption.

“Every airline has their case, and they rise from it with new perspectives,” said Samuel Engel, senior vice president at consulting firm ICF. “The airline reaches a certain point of complexity and has a disruption event of such magnitude that it needs to look deep inside.”

Both Spirit and Southwest operate so-called point-to-point networks that don’t rely on hubs like larger airlines, instead allowing planes to fly across the country. The model generally works and helps keep costs down, but it can exacerbate disruptions in extreme events.

Jordan defended the model, saying the network is usually easier to restore because travelers don’t rely on connections to get to their destination.

“The problem here wasn’t the network, the problem was how many places were hit by the weather and how many cancellations were basically continuous driving,” he said.

Compensate

Even those travelers who have been burned by an airline in an event like this have few alternatives when booking airline tickets and often focus on price and schedule, ICF’s Engel said.

Southwest, United, delta and American control more than three quarters of the US market.

“Customers consistently select their flights based on tariff and flight schedule,” he said. “When they go through a disrupted journey, they say ‘never again’ — and then they do it.”

Mark Ahasic, an aviation consultant who worked with JetBlue during the 2007 meltdown, said the airline’s reputation ” took a hit but didn’t destroy the brand.”

Southwest needs to resolve the issues that caused the holiday woes and make amends with customers, but many travelers — especially those at airports where Southwest has a strong presence — typically have few airlines to choose from, Ahasic said.

Southwest has almost finished processing customer refunds and is working on the more complex task of refunds, which Jordan says includes everything from meals to dog-sitting fees. Some travelers who have paid high prices for tight seats on other airlines are still waiting for their money.

Codi Smith, a 28-year-old artist who lives in Los Angeles, paid $578.60 for a Delta flight back to LA from his mother’s home in St. Louis after Southwest canceled part of his return trip after Christmas. Southwest offered Smith an alternate flight on New Year’s Eve, but Smith said he has multiple sclerosis and needs to return to Los Angeles early to get his medication.

“I just didn’t know what could happen,” Smith said.

Southwest reimbursed Smith for his airline portion of the trip, but as of last week it hadn’t reimbursed him for what he spent on the Delta flight. He said Southwest sent him four drink coupons on board.

“Why would I use drink tickets when you owe me $600?” he said. “I really just want that money back.”

Cameron Brainard, an announcer and country radio host, said he paid more than $1,000 to return to New York from Nashville, Tennessee, including a rental car from Louisville, Kentucky. Southwest offered him $540.02, noting in a Jan. 19 email that Brainard told CNBC that he had not yet requested the refund.

“Be sure to request this payment before it expires” in July, the email said. “This payment constitutes full and final settlement of your claim against Southwest Airlines.”

Brainard said he flies Southwest frequently and has no plans to leave the airline after his cancellation, although he would “guess twice” depending on how his refund turns out.

“I hope it makes them a better airline,” he said.