What happened
Southwest Airlines (LUV 2.10%) had a December to forget, stranding thousands of holiday travelers after a winter storm disrupted the airline's operations. The mess caused investors to head for the exits, sending shares down 15.6% for the month, according to data provided by S&P Global Market Intelligence.
So what
A storm wreaked havoc over a broad portion of the United States in late December, responsible for nearly two dozen deaths, massive power outages, and Arctic-like temperatures as far south as Florida. It's the sort of weather that causes nightmares for airline executives, but among carriers Southwest stood out for all the wrong reasons.
Issues at popular Southwest airports including Buffalo and Chicago caused a cascade effect that left planes and crews out of position across the country, leading the airline to cancel upward of 70% of its schedule at the height of the storm and causing delays for much of the week that followed.
The meltdown was widespread enough that it got the attention of lawmakers, with President Joe Biden tweeting that airlines must be "held responsible" for the troubles they caused around the holidays.
Southwest is hardly the first airline to run into a systemwide issue that makes headlines and causes mass cancellations, and if history is a guide price-conscious consumers will be quick to forget about such incidents when looking for their next flight. But if nothing else the issues will have an impact on fourth-quarter earnings, likely causing Southwest to fall short of guidance, and could linger into the current quarter as well.
Now what
As noted, to some extent these things happen. Airlines are subject to strict regulations on cabin crew flying hours and airplane maintenance, and even a small disruption can ripple through a network and cause massive issues. It's embarrassing as it is happening, but far worse airlines than Southwest have experienced these issues and lived to fly another day.
But Southwest has built its reputation on being almost the anti-airline, a low-cost maverick born in the early days of deregulation that has disrupted the industry in part by showing consumers they can demand more from an airline in terms of reliability and affordability. Southwest by reputation is the airline consumers want to fly, not the one they have to fly, and the market has historically rewarded the company with a premium valuation.
Even after this meltdown, the market values Southwest at about 0.8 times sales. By comparison, Delta Air Lines today trades at 0.4 times sales and United Airlines Holdings trades at 0.29 times sales.
In reality, Southwest today isn't that plucky upstart it once was, ranking as the nation's largest domestic airline by total passengers flown. And the airline was hit harder than most by December weather in part because of some of its unique business practices, including its preference for point-to-point flying instead of large, consolidated hubs and its constant effort to save money. That penny-pinching culture includes skimping on technology upgrades like new scheduling software that would have helped through this crisis.
In October 2018, Southwest chairman Gary Kelly, who was CEO at the time, told analysts the airline had "starved" technology upgrades "over the last decade" because its "focus was more on the commercial side."
The question for long-term holders isn't whether Southwest can survive the winter storm meltdown, or even whether it will remain a fan favorite. The issue is how long the stock can continue to justify a premium valuation in a world where there are clear signs that it is prone to the same market forces as the rest of the industry, and it is suffering from the downsides of some of the things that have always made it so unique.
There's no need to fear a crash landing, but investors should keep their seatbelts fastened even after the recent weather is long forgotten.
