ATW and CAPA editors discuss what happened to Southwest’s operations over the holidays and the potential implications of the IT meltdown on the wider airline industry.

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Rush Transcript

Karen Walker:

Hello everyone and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World and Group Air Transport Editor-in-Chief Karen Walker, and I'm delighted to be back with you for our first podcast of 2023. So happy New Year and welcome on board. This week I'm joined by my colleagues Chris Sloan, ATW and Routes Senior Editor Americas and Lori Ranson, senior Analyst Americas at CAPA. And it's great to be with you both on this first podcast of the year. Thank you for joining us. We are going to talk about what was sadly the biggest aviation headline over the Christmas of New Year holidays, and that was the operations meltdown of US carrier Southwest Airlines that saw them cancel somewhere approaching 16,000 flights and an estimated 1 million passengers being left stranded at various points.

While the event started with a huge winter storm that crossed America causing widespread travel problems for everyone, that was clearly not the only explanation for this event at Southwest. The storm was forecast and airlines made their usual preparations. Other US airlines did indeed see some cancellations and delays, but they affected a very small percentage of their flights. For Dallas-based Southwest and its passengers it was a very different story. What appears to have happened is that Southwest IT systems, and in particular its crew scheduling systems, could not cope with all the changes forced on them by the weather. So flights got delayed and canceled on top of delays and cancellations as crews were not able to be where they needed to be. And news stations and newspapers were consequently filled with pictures of long queues of people stranded at airports and hundreds of bags not reaching their destinations. Besides the scale and awful timing of the disruption, there was also a sense of shock that this had happened to Southwest.

This is the airline that proudly goes by its love ticker symbol and is known for its friendly customer service. But it ended up being called the Grinch that stole Christmas for many Americans. So what went wrong, why, and what's the possible fallout both for Southwest and the US airline industry generally? I'm very much looking forward to hearing what Chris and Lori think. Now Chris, I'd like to start with you because you were actually in Dallas at the very end of November covering the Southwest Airlines media event. And as part of that you had briefings from their top executives including CEO Bob Jordan. And you wrote an article for ATW on this about Southwest's vision for where they're going. In that they did talk about technology investment and the need for that. So what was said specifically related to technology and how does that square with what happened so soon after?

Chris Sloan:

Thank you again for having me on. Obviously they're very much aware of the importance of upgrading their tech stack and there was really a very candid admission that it was kind of stuck in the nineties, that it certainly did not match anywhere up to an airline that exists at the scale of Southwest. And that there had been a lot, obviously there's been a lot of IT improvements and adjustments on the GDS front and on the consumer side, but that on the op side it was very much lagging and that there was really a clear sense that it had to be upgraded. It's absolutely a priority, but that it wasn't going to happen overnight. And Andrew Waterson said, "Yes, we have outrun our tools, but let's make no mistake, this is a journey. This is a two to three year process."

And I would expect now following this mother of all meltdowns that that's a lot more urgency there that has developed. They also spoke a lot about, and I don't think this has played out as much in the press, is that there's still a number of new employees, a significant parts of the staff are also new in coming up to speed. So they too don't necessarily have the experience. And there's more of a seniority aspect of that in dealing with the regular operations and things of that nature. So it's not just technology, but it seems to also be personnel related as personnel become more mature and familiar with their jobs.

Karen Walker:

Yeah, so that personnel issue that you raised, of course has come out of the pandemic. And a lot of the airlines, most of the airlines. Are dealing with that as they're bringing in new people and often having to do quite a fast ramp up as traffic has come back. But at the heart of this is still the technology and what was clearly a lacking in investment of that technology and upgrades. And that didn't just happen overnight. That was clearly a year over year thing. And it still seems to me odd there, Chris, that they were talking of this being a highest priority. If it needed to be a higher priority, surely much earlier and to be acted on much earlier, which is essentially the lesson that's just been learned. Lori, I'd be curious to hear from you. Do you think that is it, it's as simple as they just didn't make it a priority soon enough? Did the pandemic then sideline some of this? And I'd also, how did you see Bob Jordan handle this?

Lori Ranson:

Thanks Karen. I do think the pandemic did sign line some of the investment. Southwest has pretty much admitted that, so that's unsurprising. But obviously this shines a light on the focus, like the laser focus on cost the last few years versus taking time to invest in tools that will actually help their profitability over the long term. So it was just sort of a balancing act that unfortunately blew up over the holiday weekend. As far as Bob Jordan, I think he's done what he's needed to do. He's been very apologetic. He has sent letters out to frequent flyers as you mentioned. He's trying to engender as much loyalty as he can, but I think we all know that he's going to have to make a few trips to Capitol Hill to face inquiries and provide an explanation for himself and Southwest.

Karen Walker:

Yeah, I definitely want to talk a little bit more about that sort of the political side of this and the outcome of this because that's not going to just affect Southwest I suspect. That could have implications across the airlines. So let's get back to that. Just before we do that though, let's just quickly recap what's the situation right now? It does seem to me that they have gradually got back getting the schedules back, but there's still a lot of bags to get back. Chris, what's happening this week?

Chris Sloan:

Well, as you know, I mean this situation really stabilized with very minimal cancellations on December 30th. And then when there was bad weather on January 2nd, they did face additional outages because they were particularly exposed in California. But it was not anywhere near, I believe it was around 160 flights, it wasn't anywhere near where it was. And even as of yesterday there was about three cancellations, 3% of the schedule canceled 140 flights, which is about on par with where Delta is and some of their competitors on the flight schedule. You're right, yes, they did say there does seem to be stabilization, but of course everybody's holding their breath. And I think I read something this morning that when you talk about bags that they pledge that those would be returned by, I believe the middle of this coming week if not sooner. So that's the stabilization I saw.

Karen Walker:

They've, as part of the bag reconciliation effort, they've done a contract with FedEx, so some people will be getting their bags by via FedEx. But yeah, they do seem to be working through and out of it this week. So in terms of people being now able to fly and get their bags back, things are looking better. But one of the big things about Southwest is not just how it's known for its friendly customer service, it's right from the beginning, known for its strong employee relationship, some people are even called it a cult there in Dallas. And I've been there several times, I know you guys have at their headquarters in Dallas, and you really feel it and it really feels genuine. There is a genuine feel of pride and love to be part of the Southwest family. What we've seen out of this is some very strong condemnation of the union leaders. And in particular some of that has been pointed at former CEO Gary Kelly, who's still on the board of course, of the Southwest board. Chris, what does that say to you about what's happening there with the unions and employees?

Chris Sloan:

Well, I mean think you're totally on point that it's been a significant part of the cultish notion they call the Warrior spirit has really been the backbone and the legacy of the company. But certainly there has been, particularly with SWAPA, a number of years of tension between the pilot's unions and transportation workers unions and some of the frontline labor forces. So it hasn't been all kind of lollipops and unicorns, if you will. But it's publicly perceived to be. I think there's a belief somehow that maybe that's the Southwest of years past and maybe that kind of cleaned that [inaudible 00:10:19] legacy. And though there still is a lot of importance in that [inaudible 00:10:24]. And by the way, during the media day, there was a lot of attention on bringing that back, that during the pandemic it just became, "Oh my God, we just have to survive and fly through this."

And there wasn't a lot of attention paid to actually bring in people together. And that culture that had kind of been the same what you just said, Lori, about technology had been kind of set to the side. But you're right, there was absolutely, I think this really exposed a lot of truculence and vitriol. These letters that we see from the unions and pilots and on focus groups are not at all what you would represent. But Karen, you nail it when you say there is a lot of love and pride, but they just want the airline back the way they are. But clearly there's also a lot of posturing as we move toward contract negotiations. And I think that that has to be thought of as a part of this.

And also to the extent I do believe Bob Jordan is being given somewhat of the benefit of the doubt here, that he is an honest broker. He started as a computer programmer, he was an ops guy, he's not a bean counter. At least that's the phrase they keep using that they continue to deride Gary Kelly as. And so there's a lot of blame and finger pointing going all around. It happens in these things, but I do think the culture has taken a hit. And resetting that back to that warrior spirit is going to be very key.

Karen Walker:

And Lori, what about the financial impact for the company? I mean, there's the cost of what's happened to them and then there's the compensation. Do we have any thoughts or insight as to how much this is going to cost them yet?

Lori Ranson:

Well, they're going to take a real hit in the fourth quarter just in terms of profitability, which is significantly dropping. There have been some estimates that chasm could be affected by 10 points and net profits are just going to, they're still going to be profitable, but they're not going to be nearly as profitable as they first anticipated. So fourth quarter is going to be really bad for them. And some of that is probably going to extend into early this year. I think there's still going to be some book away over the next few weeks, but as we all know, the consumer memory can be pretty short sometimes, especially if you're trying to regain your reputation and inject some low fares on the market. So I don't think anyone expects this is going to be sort of a long-term hit financially, but obviously in the fourth quarter not going to be pretty. And there's going to be a lot of explaining that's going to be happening on their fourth quarter earnings call.

Karen Walker:

Yeah, absolutely. I saw that, I think this was a Bernstein analyst, David Vernon put out his estimate, revised estimate for their fourth quarter earnings before interest and taxes dropping that from what they had estimated being almost 660 million to perhaps 68 million. So as you say, still profitable, but whoa, that's a big hit. And then how does this all play out politically and the impact on that? We've already seen that the Department of Transportation secretary, Pete Buttigieg has, the word he put out was this was a meltdown. There was no other word to describe it. He said it was a meltdown and he said there will be an investigation. The Senate Commerce Committee chair has also promised an investigation.

So Lori, you're right, you can expect to see, certainly Mr. Jordan, I would expect Andrew Waterson, who Chris referred to earlier, he's the COO, will be spending quite a bit of time on Capitol Hill. President Biden tweeted, "Our administration is working to ensure airlines are held accountable," it was what he said about this. That seems to me like, okay, we're going to have legislation. We need legislation to make these airlines behave. Chris, what do you think?

Chris Sloan:

I think you're right. I think there's absolutely, we have a very activist, I wouldn't use necessarily the word grandstanding, but a very pro-consumer and a very emboldened DOT secretary. And he's made no secret about going after the airlines before. And I think Southwest handed him a perfect storm of fodder and grist so absolutely you could see that happening in the current climate. And especially there's a lot of happening. I mean, we're looking at NEA, we're looking at consolidation. And so I think this potentially a bigger ripple effect on how the trajectory of the industry is going. And because they provided this meltdown that happened at, it's the perfect story. Southwest was the Grinch that stole Christmas. So I think it does have legs, and when you start seeing phrases like in that letter that we expect them to conform to the law, that's a pretty big stick to wield. So I don't think we've heard the last of this, I would agree.

Karen Walker:

And it is interesting because Buttigieg's predecessor, who was of course Secretary Elaine Chao, but that was under the Trump administration. Under Chao, the DOT took a very hands-off approach to the airline industry, that regulation isn't the answer here. They let them operate to what makes sense. And so we could see very much a reverse of that. In Europe, the European Union has got this so-called 261 2004 law, and that's passengers on canceled flights are entitled to up to, I think it's 600 euros each for a canceled flight. And that depends on certain conditions, but that's something like 635 US dollars. That's the sort of the bottom line set of compensation. Lori, do you anticipate the, could Congress be looking at that type of legislation?

Lori Ranson:

I think in the immediate aftermath, yes, definitely. In fact, recently there were two separate bills I believe introduced that would require airlines to refund within 14 days of canceling, and then a separate piece of legislation that is similar to the EU policy in which airlines would have to provide vouchers, alternate transportation, those types of things, which are not included in a proposed rulemaking by DOT, That's kind of still in the limbo phase. It codifies sort of what's a cancellation, what's a delay? Because that's been a big issue in terms of consumers being able to interpret the law and understand their rights. So what I think would happen is you'd probably see the reintroduction of some of this more, for lack of a better word, extreme legislation in terms of alternate transportation, more compensation. The likelihood of that becoming law is tough to say because then you get into the political realm.

But I think there's going to be increased rhetoric, this type of legislation will be introduced, and there's going to be a lot of big spotlight's going to be shined on airlines over the next six months to a year in terms of how they manage operational disruptions and also how they manage the aftermath in terms of consumer compensation and consumers feeling like that they're being recognized for all the hassle that they've gone through in terms of just trying to take an airline flight. And I definitely think there's probably going to be some fines issued against Southwest. I think that's probably a given. We don't know the extent, and there's going to be an extensive investigation into this. DOT is feeling some heat for probably not managing this in the way that some people think it should be managed. So DOT is going to be promoting its enforcement authority to the max terms to kind of allay some consumer concerns going forward.

Karen Walker:

So in other words, it's absolutely not just going to be the Southwest Airlines senior management watching all of this, all the airlines are going to be watching this because it will affect all of them. And now, whether it's effective or whether that legislation is effective or not is another thing. One could argue that the EU law that I mentioned earlier hasn't actually done a lot and it's been problematic to actually implement. It's the classic thing of sort of easy to put on paper, not so easy to put in. Frankly, airlines have found all sorts of loopholes every time someone's tried to claim those compensations. The one I always like to quote is British Airways. I know they're no longer part of the EU, but they've had several of these IT types of meltdowns over the years and it hasn't really made any difference at all to their customer service. Chris, what do you think? Does legislation help or hinder?

Chris Sloan:

Well, I mean, I think we look back at 2011 in the aftermath of the JetBlue Valentine's Day massacre meltdown, and that led to the Tarmac Delay Rule and the Airline Consuming Protection Act. And so I believe that it did help. And in that particular case, in terms of refunds, I mean it's really deja vu all over again. A lot of this is kind of repeating itself. And even in that case, we saw the tarmac delay extended for international carriers. So it has made some impact, but I mean, I think there's always the fear of overreaching. And are we going to find ourselves in that place and has this unfortunately poisoned the pool?

Karen Walker:

Yeah, and I'm glad you mentioned the Tarmac Delay Rule that came out of that JetBlue incident where there was a seriously long delay where people were sat on the tarmac with no water and et cetera, et cetera. So yes, but as you say, then came this rule. What that of course started was airlines obviously didn't want to face these huge fines for delays, so they built in what they call fat time built in all this extra scheduling time. They knew the flight really wouldn't take that long, but they wanted to make sure they stayed inside the window. So you got the situation now where a Washington DC to New York flight is supposedly, if you look on the schedule, takes two and a half hours sometimes. And we all know that's not true, even if LaGuardia is having a bad day. So yeah, you're right, there could be that overreaction. Lori, what do you think? And is the regulation going to be more harmful than good?

Lori Ranson:

Well, I think the airlines would argue that if you sort of fold in compensation for alternative means of transportation, meals, that type of thing, their argument I think would be, well then we're going to have to raise ticket prices to compensate for the extra expense. And I think that's probably going to be a message that they will push hard. And I suspect also when these hearings commence, you'll probably see airline executives from other carriers as well that will be summoned to Congress to say, how do we fix this problem? Explain your philosophy. So there's going to be a lot of push and pull in terms of regulation. But obviously the administration right now is feeling the heat to do something a bit drastic to show that they're on this problem, they see the issue, and they want to solve it. But the ultimate solution is a little tough to predict I think

Karen Walker:

Meanwhile back to you, Chris, just for one final word here back to Southwest specifically. Is their reputation now permanently harmed? I mean, it seems to me that they're still very much a loved airline. They have this strong loyalty base. Will that still be there?

Chris Sloan:

Yeah, I mean, I would agree with you that long term, if they manage the situation, that the public has a short memory. I mean, you look in the aftermath of JetBlue, I mean it was a much smaller carrier, but seven years into their history, the airline that was going to bring humanity to air travel had an enormous meltdown. Then a few months later, you had a flight attendant who went down the slide with a beer and you had some safety incidents happen and they all piled onto each other and they created a pretty bad mojo for that company for a couple of years. But if this is isolated, and we had a meltdown back in October of 2021 with Southwest, if it's isolated, we don't have another big event or something else, I think they can fly through it. But if something else happens, it's going to be that much more difficult for them. And so I think that's really, really the concern is the story really has not been written because we have a spring and a fall and other weather and other events to get through, but hopefully they'll fly through it.

Karen Walker:

So if I can use a soccer analogy or what I call football analogy, two yellow cards, they don't need a red card past this. So Chris, Lori, thank you so much for your insights and thank you also to our producer, Guy Ferneyhough. Thank you also of course, to our listeners. And make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. If you are on Apple Podcasts, remember that you can also rate us and provide feedback, and that helps us select our topics and pick the subjects that you most want to hear about. So until next week, this is Karen Walker disembarking from Window Seat.