Southwest Airlines forecasts loss after mass holiday cancellations

© Reuters. FILE PHOTO: Southwest customers visit the help desk after U.S. airlines, led by Southwest, canceled thousands of flights due to a massive winter storm which swept over much of the country before and during the Christmas holiday weekend, at Dallas Love Fie

By Abhijith Ganapavaram and Kannaki Deka

(Reuters) -Southwest Airlines Co said on Friday it expects to post a loss in the fourth quarter after it canceled over 16,700 flights between Christmas and New Year's Eve due to a tech meltdown.

The mass cancellations during the peak season for U.S. airlines will result in a pre-tax hit of $725 million to $825 million to quarterly earnings, said Southwest, which had earlier forecast a strong profit.

Shares of the company fell 2.8% premarket before turning positive in morning trade.

On Thursday, the largest U.S. domestic airline promised a thorough review of the operational collapse after a union leader blamed its outdated scheduling system and said the carrier had not identified how to avoid a repeat.

During winter storm Elliott, Southwest's crew scheduling software failed to bear the load of staffing changes made by the airline and workers had to manually match crew and planes that led to huge waiting times for pilots and cabin crew.

The carrier is a popular option for customers looking for quick travel times as it relies on a point-to-point service to connect vast swathes of the country, instead of operating out of large hubs. But adverse weather made it difficult for it to marshal staff scattered across the nation.

The impact from the cancellations will spill over to the current quarter, Cowen analyst Helane Becker said, after the company scrapped many flights in a bid to reset its system.

Southwest, which led cancellations among U.S. carriers for much of the last two weeks of December, has invited scrutiny from the U.S. government and a lawsuit.

PRESSURE FROM ALL SIDES

The White House has said Southwest "failed its customers", while the pilots union, which is in heated contract negotiations with Southwest, on Dec. 31 published a letter denouncing company leadership as a "cult" that has spent the last 15 years destroying the airline's legacy.

"It is unclear to what extent this episode leads management to upgrade flight operations software, establish crew bases or the like," Citi Research analyst Stephen Trent said in a note.

Before the recent crisis, Southwest had cultivated a reputation for reliable customer service, humorous flight crews and low-cost flights.

Southwest Chief Executive Bob Jordan said in a video posted on the company's website on Thursday, following criticism from the union, the airline had made "great progress" in processing tens of thousands of refunds and reimbursements, and delivered the vast majority of bags that went missing.

But Bernstein analyst David Vernon said in a note earlier this week, "it may take time for Southwest to repair its brand perception with investors."

The airline said on Friday that holiday cancellations were likely to have cut its capacity by about 6% in the fourth quarter compared to 2019, roughly 4 points less than its previous forecast.

Revenue loss from the disruptions is expected to be between $400 million and $425 million, it said, adding the net loss forecast includes the increase in operating expenses from reimbursements, value of 'Rapid Rewards' points offered as a gesture of goodwill to customers, and extra pay for employees.