Southwest might be making progress recovering its operation and returning bags to customers but the financial impact of its holiday meltdown is just beginning.

Southwest expects to report net loss in 4Q 2022

Unsurprisingly, Southwest expects report a net loss in the fourth quarter of 2022 due to the mass cancellations, which were caused by an operational failure triggered by bad weather.

The disruption happened during peak travel season. Southwest now estimates a pre-tax loss of between $725 million and $825 million for the fourth quarter after previously forecasting a strong profit. This includes lost revenue as well as the costs of reimbursing customers and offering Rapid Rewards points as an apology. Southwest estimates that the revenue loss from the disruptions will be between $400 million and $425 million.

Prior to the pandemic, Southwest had not reported a quarterly loss in over a decade.

The cancellations have led to a reduction in capacity by about 6% in the fourth quarter compared to 2019, roughly 4 points lower than its previous forecast.

Reputational impact of Southwest meltdown

The operational failure has not only had a financial impact on Southwest, but it has also damaged the airline’s reputation for reliable customer service.

An estimated two million customers were affected by the meltdown.

Southwest has faced harsh criticism for its handling of the situation. The White House said Southwest “failed its customers” and that the government would seek to fine the airline if it doesn’t properly reimburse people for their losses. Southwest has already been sued for not providing refunds to stranded passengers while Secretary of Transportation Pete Buttigieg said the airline could not blame its meltdown on weather.

The operational failure was caused by an outdated crew scheduling system which was overwhelmed by the staffing changes required as a result of the weather.

Southwest has not yet disclosed how much it has paid in refunds or how many refunds it has processed. It did announce it would give affected customers 25,000 Rapid Rewards points, which it values at more than $300, as a goodwill gesture. Southwest has promised to undertake a thorough review of the operational collapse and has vowed to cover the additional expenses of affected travelers.

Bottom line

Southwest is still reeling from the impact of its holiday meltdown. In addition to the 4Q 2022 financial hit, there will be long-term reputational damage and scrutiny from regulators and investors. Southwest has promised to undertake a thorough review of the operational collapse and has vowed to cover the additional expenses of affected traveler.