Southwest Airlines Stock Takes a Hit After Wave of Cancellations

A Southwest Airlines ground crew member organizes unclaimed luggage at the Southwest Airlines luggage area, at Los Angeles International Airport in Los Angeles, Calif., on Dec. 28, 2022. Robyn Beck/AFP/Getty Images

Shares of Southwest (LUV) sank more than 10 percent this week after the airline canceled thousands of flights during the busy Christmas travel week, prompting scrutiny from federal officials. Despite a more than 3 percent rebound in early Thursday trade, some investors may avoid the company for some time due to its now-tarnished reputation.

Southwest has canceled more than 15,000 flights in the past week, with almost 2,400 more cancellations scheduled for Thursday, according to data by FlightAware.

“Southwest stock is under pressure for two reasons,” James Demmert, chief investment officer of Main Street Research told The Epoch Times. “The first is related to their recent route crisis—perhaps one of the worst in airline history. The second is related to the overall bear market.”

Southwest stock has dropped more than 24 percent year to date.

The airline’s widespread operational disruptions stemmed from its “point-to-point” flight coordination model, according to observers, which is different from the industry standard of “hub-and-spoke” system. In the hub-and-spoke system, planes fly to hub airports after completed trips and wait to be dispatched for their next trip.

Southwest’s model allows passengers to fly between cities without first traveling to a larger city or hub. Winter storm Elliot, however, placed considerable strain on Southwest’s point-to-point network. While other airlines were able to dispatch planes and crews from various hub locations, many Southwest aircraft were stranded in the snow-covered northeast.

Lack of available staff and outdated computer systems also played a crucial role, according to observers.

A leaked Dec. 21 memo revealed the stress experienced by the airline’s senior staff ahead of the storm, with Southwest Vice President of Ground Operations Chris Johnson declaring a “state of operational emergency” to Denver airport personnel.

Johnson’s memo cited an “unusually high number of absences” ahead of the storm and went on to list temporary measures intended to maintain adequate staffing. The emergency measures proved insufficient.

Southwest’s cancellations on Tuesday represented 64 percent of the airline’s total scheduled flights for the day. Most North America-based airlines were able to manage the winter turmoil, with Spirit Airlines canceling 12 percent and big names like United, Delta, and JetBlue all canceling fewer than 4 percent on the same day.

Southwest CEO Bob Jordan released a public apology on Dec. 27 and said the company is working to process refunds to affected customers. “We have some real work to do in making this right. For now, I want you to know that we’re committed to that.”

U.S. officials are putting pressure on the airline and its CEO to remedy the issue.

“I made clear that our department will be holding them accountable for their responsibilities to customers, both to get them through this situation and to make sure that this can’t happen again,” Transportation Secretary Pete Buttigieg said on Dec. 27 during an interview with CNN.

In a separate interview with PBS, Buttigieg vowed that his department would ensure Southwest would go “beyond the letter of law” in its conciliatory efforts towards customers. Included in the secretary’s demands was that Southwest would reimburse customers for hotels, ground travel, and meals purchased during the affected period.

Many Southwest customers have been stranded at the airport for multiple days. One Kansas City traveler shared a video via Twitter and lamented the airline for causing her to miss Christmas.

“The line to talk to an agent is a 6 hour wait to fix any cancelled [sic] flights,” the passenger explained in a later post on Twitter.

While some have blamed the airline for cutting corners and failing to update outdated systems, Paul Krugman, economist and New York Times columnist, said the debacle was primarily due to Southwest’s point-to-point model.

“Point-to-point has advantages in normal conditions. In fact, other airlines have, to some extent, been moving back to the direct flight system over time,” Krugman posted on Twitter on Wednesday.

From an investor’s perspective, Demmert is not betting on a rebound anytime soon. “We would avoid the stock given the now tarnished brand and the continued bear market we see in the first quarter.”

On a relative basis, the stock is not yet a bargain either, according to the wealth manager. “The stock trades at a price multiple of 25 which is also at a premium compared to other airlines.”