Although Dallas-based Southwest has begun to stabilize its operations, industry watchers say the impact of this week’s explosion could affect its renowned reputation for customer service. It’s a rare moment for Southwest — an industry pioneer that has distinguished itself as the only U.S. airline with five decades of consecutive profits.
After the devastation, Southwest Airlines is preparing for near-normal operations
But experts say the company’s business model and recent growth made this week’s failure inevitable.
“This is more than the storm of the century,” said Andrew Inkpen, a management professor at Arizona State University’s Thunderbird School of Global Management, referring to union statements that Southwest delayed upgrades to its information technology systems. “It exposed them, but they will be exposed at one point or another.”
The winter storm that crippled Southwest’s operations was extreme, but some of the logistical problems that occurred were not entirely unexpected.
In October 2018, then-CEO Gary Kelly said on an earnings call that cost control was the company’s top priority and that other items might have to wait. As an example, he cited technology upgrades for the operations team, according to a transcript compiled by S&P Capital IQ. “In the last decade, we’ve starved them a little bit because, again, our focus has been more on the commercial side,” he said.
In February 2021, Southwest updated its information technology risk disclosure in its securities filing, noting that it had “postponed a significant number of technology projects” during the pandemic. The company has continued to invest in technology, including “flight planning and scheduling.”
Southwest declined to make an executive available for an interview. “It is too early to speculate on the root cause of this week’s outages,” the company said in a written response to questions.
The sudden turmoil overshadowed Southwest’s strong recent performance. The company expanded to 18 new cities during the pandemic, more than its peers, and became the first airline to restore its dividend to shareholders this month. Southwest posted a record quarterly profit over the summer, and executives said it delivered one of its best operating showings on Thanksgiving Day, with less than 1 percent of flights canceled.
Unions say Southwest ignored calls to improve technology before collapse
The operation, which now operates 742 aircraft in 42 states and 10 other countries, began on a cocktail napkin at a hotel bar in San Antonio in 1967, the company said. Herb Kelleher, a lawyer at the time, and Rollin King, a pilot, sketched out their idea for a low-cost airline that would carry passengers between Dallas, Houston and San Antonio.
Southwest distinguished itself as a brash airline whose flight attendants wore boots and hot pants and whose marketing grew from the airline’s beginnings at Love Field in the Dallas area. The airline’s logo is a heart, and LUV became its stock code.
The business worked. As Southwest has grown, it has become a model of corporate success, familiar with business-school models, and known for its healthy company culture and customer relationships. Unlike other major US airlines, Southwest has remained consistently profitable and has become one of the largest domestic airlines by passenger numbers.
Michael Mazzeo, a strategy professor at Northwestern University’s Kellogg School of Management, has said for years that “if you want to do a case study of a well-run company, it’s Southwest Airlines.”
The company’s report to shareholders is full of accolades for workplace and customer service, and on-time performance and customer satisfaction metrics are factored into the calculation of executive bonuses. And some of their customers are very loyal thanks to simple customer perks like relatively cheap flights and travel vouchers that don’t expire.
Before the pandemic, Southwest posted an unbroken streak of annual profits in a notoriously turbulent industry going back at least to 1978, according to Capital IQ data. Experts note that Southwest is the only major US airline that has never been forced into bankruptcy.
As it expanded to other cities, the airline kept fares low by diverting passengers to smaller airports in major urban centers, such as Midway in Chicago. It also flew only one type of aircraft, the Boeing 737, and served peanuts instead of in-flight meals and offered no assigned seating. Crucially, it adopted a city-to-city system rather than transiting passengers through a central hub like other airlines—a strategy to cut costs and reduce layovers.
However, this strategy, known as point-to-point, also has its weaknesses. When problems arise at an airport or at one point in its network, they can set off a chain reaction that is more difficult than a centralized hub model.
“It will be difficult to get our point-to-point network up and running on time,” Southwest Chief Operating Officer Andrew Watterson told analysts this month. “We have initiatives planned to help mitigate the impact of breaches and improve our recovery time.”
Upgrading the technology of legacy systems can be expensive, and Southwest has spent heavily to improve its reservation system, maintenance records, and ground operations such as baggage handling.
Ensuring crews are in the same places as planes and scheduled flights is part of the incredibly complex dance of modern aviation and is largely invisible to the flying public until something breaks. Southwest’s legacy software was suddenly thrust into the public eye last week when a blast of Arctic air swept across much of the country, nearly shutting down airports in Denver and Chicago.
Southwest was unable to deliver crews in these cities to the rest of its network. Company officials said the software the company used to restart operations was overloaded and much of the work had to be done manually.
Mazzeo, the Northwest professor, said that despite Southwest’s reputation as a model company, it doesn’t have the ability to invest in technological upgrades and overcome such challenges immediately.
“The irony here is that everything that’s amazing about Southwest as a business model has a downside,” he said. “It’s like fine china. It looks great.” But if subjected to strong force, it “breaks.”
Southwest faces regulatory scrutiny as thousands more flights are canceled
This isn’t the first time in recent memory that Southwest has been forced to cancel flights en masse for days at a time. A smaller outage in October 2021 cost the company $75 million. Analysts at Raymond James & Associates expect the company, which reported earnings of $277 million last quarter, will still turn a profit in the final three months of the year.
Donna Roberts, a professor at Embry-Riddle Aeronautical University who specializes in psychology, said in some ways, fixing the broken scheduling technology may be simpler than restoring Southwest’s reputation among stranded consumers. Although he had never flown on a Southwest flight, he said he was well aware that the company had a larger-than-life founder in an often colorless industry.
“The Southwest has been like America’s sweetheart,” he said. “They have to win hearts and win back the trust of the consumer.” It could be done if they leaned into a heavy advertising blast, he added, urging them to “be brilliant about how to get it to people.”
Dallas-area resident Jeff Galaska, 37, told The Post that he and his family waited nine hours at Love Field on Christmas Day before finally having to go home. She said the experience was frustrating, especially when her bags arrived at their destination without her and her family.
But the father-of-two said the bags had now been sent to him and the airline had fully refunded his tickets and included additional traveller’s vouchers.
“This kind of situation seems like a once in a million situation [Southwest],” he said. “I’m sure we’ll probably come back and use them again in the future.”