Southwest Airlines (NYSE:LUV) has a flight cancellation problem.
As air travel demand has come roaring back in 2021, the low-fare airline giant has rapidly ramped up flight volumes. However, it has struggled to operate its schedule reliably in recent weeks, because of a combination of staffing shortages, an IT outage, and bad weather. If Southwest can't get its operations back on track quickly, the airline could squander the growth opportunities it has been pursuing over the past year.
Flight cancellations mount
Last month, Southwest Airlines canceled 2,687 flights, an average of about 90 per day. More than 34,000 of its flights were delayed. The carrier underperformed its top competitors by a wide margin on both metrics.
The trouble began around the middle of the month. A problem with a weather data provider on June 14 caused Southwest to delay more than 1,400 flights. The following day, a separate IT outage forced it to cancel about 500 flights and delay more than 1,300 others. Flight cancellations continued at an elevated rate in the subsequent days, as Southwest struggled to reposition flights and crews following these disruptions.
Southwest Airlines has continued to cancel lots of flights over the past two weeks. The airline primarily blamed bad weather. Southwest executives have also noted that while the carrier is still operating fewer flights than it did before the pandemic, its flying is spread across more routes and more cities. That has added operational complexity, making it hard to recover from weather events and other external challenges.
By contrast, Southwest's pilot union claims that management has scheduled way too many flights given current pilot availability. Indeed, while the carrier's schedule might be feasible under ideal circumstances, the rash of delays and cancellations in recent weeks suggests that management didn't build in an adequate margin of safety.
Trying to stop the bleeding
It's not surprising that Southwest Airlines' flight cancellation problem has been getting worse rather than better. Last month, the airline said it planned for capacity to be just 7% below 2019 levels in June and 3% below 2019 levels in July, compared to an 18% reduction in May. Capacity typically increases sequentially from May to July as well, so Southwest has ramped up its flight schedule by more than 20% in a matter of weeks.
In an attempt to prevent things from getting worse, Southwest Airlines has offered many of its employees -- including flight attendants, ground crew, and cargo staff -- double pay to work overtime in the first seven days of July.
Unfortunately, it couldn't reach an agreement with its pilots for a similar arrangement. That may limit the effectiveness of this premium pay program, as pilot staffing is particularly tight right now. Over 600 Southwest pilots took early retirement offers during the depths of the pandemic last year. Hundreds more remain out on voluntary leaves. Moreover, many pilots need catch-up training to be cleared to fly again.
Southwest Airlines needs to fix this quickly
So far, Southwest's attempt to fix its reliability issues by throwing money at the problem doesn't seem to be working. The airline canceled 212 flights on Thursday -- more than 5% of its schedule -- and 194 on Friday, according to FlightAware. Another 40% of the carrier's flights were delayed on Thursday, and on-time performance wasn't much better on Friday.
The recent rash of delays and (especially) cancellations is aggravating customers, causing some to reevaluate their loyalty to Southwest Airlines. For now, these are just anecdotes, but as the number of impacted customers rises, the likelihood of significant damage to Southwest's reputation increases, too.
Southwest Airlines has been gearing up for a big growth push recently. It has added 18 cities to its route map since early 2020 and recently exercised 34 Boeing 737 MAX 7 options, more than doubling its scheduled aircraft deliveries for 2022. This could cause its staffing shortages to linger, unless it rapidly hires and trains additional employees. At the same time, if the carrier alienates a lot of customers in 2021, demand could fall short of its projections next year.
Customers typically don't care why their flight was canceled. They care about missing a meeting or the disruption to their vacation plans. Southwest Airlines can't make excuses for its poor operational performance over the past few weeks. The airline just needs to fix its operation as soon as possible. If it doesn't, the company could permanently damage its brand -- and its long-term growth prospects.