Is Southwest Airlines (LUV) Collapsing?

Southwest Airlines (LUV) has become one of America’s most hated companies because of its Christmas Cancellation Crisis.

For example, Southwest canceled 2,350 flights, almost 60% of its schedule on 29 December 2022, Huffpost estimates. That was an improvement from 27 December 2022 when Southwest canceled 72% of its flights, CNN estimates.

CNN charts show Southwest canceled 30% of its flights between 23 December and 28 December 2022. For example, Southwest canceled 30% of flights on 23 December 2022, 35% of its flights on 24 December 2022, 33% of its flights on Christmas Day 2022, 66% of its flights on 26 December 2022, 72% of its flights on 27 December 2022, and 63% of its flights on 28 December 2022.

What is Wrong at Southwest Airlines?

In contrast, United Airlines canceled 3% of its flights on 27 December 2022 and 0% of its flights on 28 December 2022. Similarly, Alaska Airlines canceled 4% of its fights on 26 December 2022 and 1% of its flights on 28 December 2022. Therefore, the problem is Southwest Airlines (NYSE: LUV) itself, not the airline industry.

Competitors’ flight cancellation rates fell as Southwest’s rate rose. For example, Delta Airlines reported a 22% cancellation rate on 23 December 2022 that fell to 0% on 28 December 2022. Similarly, United reported a 21% cancelation rate that fell to 0% on 28 December 2022.

Many observers blame Southwest’s business model, which uses a point-to-point system. To explain, Southwest does not maintain hubs as bases for planes. Most American airlines use a hub system in which air crew live in the city where the flight originates.

Why is Southwest Melting Down?

Southwest (LUV), however, uses a point-to-point system in which the plane has no base. Instead, a flight picks up crew as it flies. Hence, if a plane that originates in Chicago cannot land in Denver because of weather, it cannot pick up a crew who live in Colorado.

Another problem is Southwest’s outdated information technology. For example, Southwest managers schedule flights and crew manually. CNN alleges there is no database of Southwest employees’ contact information managers can access digitally. Hence, it can be hard for managers to locate or contact employees. Southwest computers use 20-year-old software, Diginomica’s Neil Raden alleges.

Southwest managers had to call aircrew by phone because there is no app or messaging system, ZDNet alleges. If managers had no phone number of workers, they could not reach aircrew.

The problems are not new. A March 2022 letter from the Union of Southwest Airlines Flight Attendants Local 556 alleges that “operational mishaps and technology shortcomings” were leaving aircrew stranded last year.

A 17 August 2021 CNN Business analyst David Goldman wrote “flying Southwest Airlines has been a toxic mix of canceled flights” almost 16 months before the Christmas 2022 meltdown. The article attacked Southwest’s outdated scheduling software that could not keep up with changes.

“The process of matching up those crew members with the aircraft could not be handled by our technology,” Southwest Chief Operating Officer Andrew Watterson admitted in August 2021.

Thus, Southwest management was aware of the problems, and nobody did anything about them. Disgustingly, Southwest is now offering flyers a $300 voucher and 25,000 frequent flyer points to win back flyers. Winning back flyers will be tough because thousands of Southwest passengers were still missing bags on 3 January 2023.

Southwest Airlines’ Public Relations nightmare

Southwest Airlines (LUV) is facing a public relations nightmare because of recent actions. For example, Southwest reinstated its 18₵ quarterly dividend on 7 December 2022 (ironically Pearl Harbor Day).

Moreover, Southwest received $7 billion in federal aid during the COVID-19 pandemic when flights were empty. That aid included payroll support to keep pilots and aircrew on the job.

Yet, Southwest was suffering staffing problems in December 2022. The New York Post alleges Southwest was asking headquarters office workers to fill ground crew jobs. Business Insider claims Southwest managers sent out “internal memo” begging employees to fill jobs.

Yet, Southwest was suffering staffing problems in December 2022. The New York Post alleges Southwest was asking headquarters office workers to fill ground crew jobs. Business Insider claims Southwest managers sent out an “internal memo” begging employees to fill jobs.

How Much Money is Southwest (LUV) making?

Strangely, Southwest Airlines (NYSE: LUV) is making money. For example, Southwest reported a quarterly gross profit of $1.549 billion and a quarterly operating income of $395 million on 30 September 2022.

However, the quarterly gross profit fell from $1.717 billion on 30 September 2021 and the quarterly operating income fell from $733 million on 30 September 2021. Conversely, Southwest’s quarterly revenues rose from $4.679 billion on 30 September 2021 to $6.22 billion on 30 September 2022.

Stockrow estimates Southwest’s quarterly revenues grew by 32.93% in the quarter ending on 30 September 2022. I attribute the high revenue growth rate to COVID-19, which kept people from flying for a year or longer. The quarterly revenue growth rate fell from 67.86% on 30 June 2022 and 160.96% on 30 September 2021.

I suspect Southwest will not report high revenue growth rates after the cancellation crisis.

How Much Cash is Southwest generating?

Interestingly, Southwest Airlines (LUV) is generating more cash. The quarterly operating cash flow rose from -$575 million on 30 September 2021 to $1.906 billion on 30 June 2022 and fell to $234 million on 30 September 2022.

Conversely, the quarterly ending cash flow rose from -$1.114 billion on 30 September 2021 to $13.098 billion on 31 March 2022. However, the quarterly ending cash flow fell to -$2.971 billion on 30 September 2022.

Moreover, Southwest is paying off a lot of debt. It reported a quarterly financing cash flow of -$1.905 billion on 30 September 2022. The quarterly financing cash flow fell from -$158 million on 30 September 2021. Conversely, Southwest’s total debts shrank from $11.238 billion on 30 September 2021 to $8.696 billion on 30 September 2022.

What Value Does Southwest Airlines Offer?

Despite its problems, Southwest is still a cash-rich company. It had $13.673 billion in cash and short-term investments on 30 September 2022. However, the cash and short-term investments fell from $16.004 billion on 30 September 2021.  

Southwest is losing value. Its total assets shrank from $37.110 on 30 September 2021 to $35.946 billion on 30 September 2022. Similarly, Southwest’s share value fell from $44.66 on 4 January 2022 to $35.08 on 6 January 2023.

I predict Southwest’s share price will keep falling as the fallout from the cancellation crisis. I also predict Southwest could have to cancel future dividends to keep the public happy.

My prediction is Southwest Airlines (LUV) will collapse. After the collapse, I imagine a larger carrier will absorb Southwest. I cannot see a future for this discount carrier so I advise investors and fliers to stay away from it.