Southwest Says Holiday Scheduling Fiasco Will Cost Them $800 Million

Southwest Airlines says its holiday flight cancellation debacle will cost the company up to $825 million as it processes refunds for customers and prepares to upgrade its scheduling software, which is projected to be a pricey endeavor. 

The airline canceled more than 16,700 flights over the busy holiday travel period, affecting hundreds of thousands of passengers in an episode sure to reverberate for a long time to come. 

Southwest expects the operational disruptions to result in a net loss of between $725 million and $825 million in the fourth quarter of 2022, it said in a securities filing. 

Roughly $400 million is estimated revenue lost from canceled flights. The remainder reflects the total amount the airline expects to spend on reimbursing customers and offering them perks and incentives — like travel rewards, to allay passengers' frustrations — as well as on overtime wages paid to employees. 

The damage exceeds the roughly $760 million of net income the carrier made in the first nine months of 2022.

Mandatory refunds

Southwest's own contract of carriage mandates that it provide refunds for canceled fights, plus reimbursement to customers for incurred costs like hotels, meals and rental cars. Generally, when the carrier cancels or changes a flight, it will reaccommodate passengers on another flight or refund them the fare, the contract states. The airline also promises to provide refunds within seven business days of a refund request for tickets purchased using a credit card, or within 20 days for tickets purchased with cash.  A passenger caught up in the holiday fiasco this week sued Southwest  for not immediately reimbursing customers. "Southwest's failure to provide prompt refunds for canceled flights violates not only its own contract of carriage, but also federal law," states the lawsuit filed in the Eastern District of Louisiana.

As of Thursday, three-quarters of customer refunds had been completed, the airline told CBS News.

Other costs that will weigh on Southwest's bottom line include goodwill gestures like providing customers with 25,000 reward points, equal to roughly $300 each. 

Cancellations were "within airline's control"

While Southwest blamed its meltdown on winter weather, the airline faces scrutiny from the U.S. Department of Transportation for the extent of the disruptions Southwest faced compared to other domestic airlines.  "While weather can disrupt flight schedules, the thousands of cancellations by Southwest in recent days have not been because of the weather," U.S. Secretary of Transportation Pete Buttigieg wrote in a letter to Southwest CEO Robert Jordan. "As Southwest acknowledges, the cancellations and significant delays at least since December 24 are due to circumstances within the airline's control."

The Southwest Airlines Pilots Association said the epic operational collapse "was not a surprise to anyone but the leadership of Southwest Airlines."

The union added that "the worst of the effects were absolutely preventable." It argued that the collapse was the result of the company's failure to modernize its pilot and crew scheduling software, and more generally to modernize operations. 

SWAPA said it had previously raised this weakness with Jordan and his predecessor, Gary Kelly. 

It's unknown exactly how much it will cost Southwest to upgrade its pilot and crew scheduling systems and how swiftly these upgrades will be made. 

"It's probably in the $50 [million] to $100 million range," said travel industry analyst and Atmosphere Research Group co-founder Henry Harteveldt. "But what concerns me is if Southwest digs into its technology systems and as it seeks to make the improvements it needs to make, they may realize there are far more systems that need to be either upgraded or replaced than they expect. If that's the case the cost could increase dramatically." 

Reputation experts expect Southwest to underperform in the market as it attempts to recover from this negative hit to its reputation. 

"Reputational damage can have a long tail with increased equity volatility," said corporate reputation expert Nir Kossovsky. "In addition to the large swath of customers who are angry and disappointed, reputational damage of this magnitude often triggers a pile-on of regulators, litigators, and activists. There are also costs associated with lost loyalty of employees who saw the crisis coming, were disappointed by the company's risk management and had to stand on the front lines when an estimated 2.3 million angry customers sought relief."