Southwest Airlines has emerged from a calamitous holiday meltdown battered and bruised. But analysts aren’t convinced the damage will be long-lasting or lead to major changes at the carrier.

“Just give it a couple more months,” said Bloomberg Intelligence aviation industry analyst George Ferguson. “Southwest won’t be in the headlines. Someone else will have a meltdown.”

In the eight days that began with the arrival of Winter Storm Elliott on Dec. 22, Southwest canceled more than 15,700 flights, according to FlightAware. 

The impact on December quarter results will be substantial. According to an estimate by Raymond James investment analyst Savanthi Syth, Southwest can now expect its earnings before interest, taxes, depreciation and amortization (Ebitda) margin to be just 2.4% for the quarter, down from the pre-meltdown estimate of 10.4%.

In addition to lost revenue from the canceled flights, the carrier will incur large costs as it reimburses customers for hotels, meals and other expenses related to the cancellations and delays. Southwest will also give 25,000 Rapid Rewards points to each flyer impacted by the operational failure between Dec. 24 and Jan. 2.

But Syth doesn’t expect consumers to steer clear of Southwest for long. 

Some will book away from the carrier during the first quarter, she wrote, but that should moderate heading into Q2.

Southwest’s old crew-scheduling system

Southwest’s operational collapse, while triggered by Winter Storm Elliott, was ultimately blamed by most on the combination of its point-to-point business model and its aging crew-scheduling system. 

Under the point-to-point model, Southwest flies individual aircraft to several cities in a day. During challenges caused by weather or air traffic control delays, the point-to-point model is disadvantage compared with the hub-and-spoke models used by Delta, American and United, which can keep delays regionalized.

Meanwhile, Southwest’s crew-scheduling system still relies, in part, on manual reports phoned in by pilots. Unions representing Southwest pilots and flight attendants came down hard on that system during the meltdown, saying that they have warned management for years that it wasn’t adequate for such a large and complex operation.

In an early December presentation to investors, Southwest CFO Tammy Romo said that the airline spends hundreds of millions of dollars on technology annually, though she didn’t specify how much had been budgeted for crew-scheduling upgrades in the coming years. 

With the operational failure ongoing in late December, CEO Bob Jordan said that work on crew-scheduling IT, which was already underway, will be dialed up this year. However, the airline has not provided any specifics on the investment amount or timeline. 

And analysts are skeptical.

In her Dec. 29 analysis, Syth wrote that she doesn’t expect Southwest to make a significant increase to its capital expenditure budget. The carrier, she noted, has already been investing heavily in system upgrades.

Turbulent labor relations with pilots

Ferguson, meanwhile, expressed skepticism that the crew-scheduling system played as big of a role in the operational collapse as many believe. The airline, he said, flew more in 2019 than this year, but without similar catastrophic disruptions.

He pointed instead to ongoing negotiations between management and the Southwest Airlines Pilots Association over a labor contract that became amendable in September 2020, suggesting that the situation “wouldn’t have spiraled as far out of control if the pilots had been a little happier about what was happening in the company.” 

It will be key, Ferguson said, for Southwest to wrap up a deal with pilots. 

The union has also used the meltdown to lean on management in relation to the negotiations.

In a Dec. 30 op-ed in The Hill, union president Casey Murray called on Jordan to release a clear timeline for replacing Southwest’s crew-scheduling system, and also to settle open labor contracts immediately.

“Happy, motivated and properly resourced Southwest employees are the only ones who can repair the damage done to Southwest’s reputation,” Murray wrote.

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