Southwest Airlines Stock Continues To Drop In The Wake Of Canceled Flights

Key takeaways

• Southwest Airlines has been considered one of the best airline stocks for many years.
• The company failed to reinvest in its systems, compounding the issues that surfaced during the holidays.
• The down market has hurt the stock price, but it also dropped due to the fiasco.

Southwest Airlines has been the gold standard of airline stocks for many years. However, a lack of reinvestment in the company’s systems over the past 20 years caught up to the airline during the holiday travel season.

Due to many issues, Southwest canceled over 70% of its flights. Here is what happened and the impact it had on the stock.

Cream of the crop

For many years, Southwest Airlines (LUV) stock was considered among the best airline stocks to own due to its ability to profit and maintain a stable stock price.

Many investment experts advised investors to “buy the dip” whenever the stock went below a historic low since it always rebounded and gained value. The stock also pays a dividend. Although that payout was suspended for the pandemic, it has since been resumed.

Investors like Southwest Airlines because it maintains stable and smooth operations. It also holds gates at major airports around the country.

When Southwest was founded, it intended to disrupt the airline industry by providing fewer amenities, low ticket prices, and quality customer service. Southwest’s management seemingly maintained this with ease.

Unfortunately, the company failed to invest in its technology infrastructure after the retirement of CEO Herb Kelleher in 2001 and his eventual stepping away entirely in 2008.

A series of unfortunate events during the peak holiday travel season of 2022 caused multiple cracks in Southwest Airlines’ seemingly unbreakable operations. These issues negatively impacted thousands of travelers.

Double whammy

A major winter storm and cold front affected most of the country three days before Christmas, resulting in dangerous conditions for passenger jets.

Many airlines canceled flights, but Southwest canceled roughly 20% of its schedule on December 22, 2022, and continued to do so while other airlines recovered. By December 27, Southwest had canceled approximately 70% of its flight schedule.

Southwest initially blamed inclement weather that affected its major hubs, but employees were also calling out sick in large numbers. This prompted the company to issue an internal memo that threatened employees would lose their jobs unless they saw a doctor to verify their illness.

However, the malfunctioning of the antiquated software system used for staffing flights and terminals exposed how Southwest’s management had set the airline up for failure.

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Obsolete software

The software used by Southwest Airlines to staff its operations dates to the 1990s and relies on a phone system for employee check-ins. Employees must call the system to let it know where they’re currently located.

For example, if a crew has a flight canceled, they won’t reach their destination and the next assigned flight. The crew has to call the scheduling system to let the airline know where they’ll be and arrange for lodgings while they wait for the next available flight.

During the software meltdown, employees were left on hold for hours while they waited to connect with the system and let it know where they were located.

Compounding the problem, employees are subject to Federal Aviation Administration safety regulations requiring flight crews to rest for a specific period between flights. Employees waiting for hours would enter the time-out period and be barred from working flights.

The standard solution is to bring in a flight crew from another location. However, those crews were experiencing the same issue as all other crews who had their flights canceled.

This issue extended to pilots who were in the cockpit and waiting to take off but were unable to due to their inability to connect with the flight scheduling system.

Southwest Airlines tried to blame the issue on the weather and employee callouts. However, the airline had experienced excessive flight cancellations before the incident, notably in October 2021.

The software’s issues were well-known, but management opted to spend money on stock buybacks and generous executive compensation. Decades of neglect and patchwork software repairs came to the forefront when a vital software function failed.

Impact on Southwest stock price

Southwest’s stock price had declined before its operational meltdown, but the fall had been tracking the overall losses in the stock market. On Friday, December 23, 2022, the stock price closed at $36.09, even though the flight cancellation issues were already known.

The stock price dropped to $32.19 by the end of the day on December 28, 2022, after the software issue was exposed. There was a slight rebound by the end of the week as the stock closed at $33.67, but it fell again on January 3, 2023, closing at $32.60.

Whether or not buying the latest dip in Southwest stock is a good idea remains to be seen. Only time will tell if the airline can rebound.

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The bottom line

It’s too soon to tell if Southwest Airlines will overcome this debacle and see its stock price improve. The airline is unlikely to get shut down, but it may also face fines from the federal government for its mismanagement and handling of the situation.

Southwest has no choice but to upgrade its computer system at this point. It has a long way to go in terms of recovery, regaining customer trust, and returning to its reputation as a stable and reliable airline.

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