Good morning,
Southwest Airlines celebrated the holidays with flight cancellations, computer system issues, and dissatisfied customers. And it was costly. In Q4 2022, the airline incurred an $800 million pre-tax negative impact on earnings. There was a net loss of $220 million, or $0.37 loss per diluted share.
One of the hardest things for a CEO and CFO to do after a disappointing quarter is address investors in an earnings call. However, in the case of Southwest Airlines, it was also important to address the fact that customers were stranded in airports and employees had to stand on the frontline during the days of chaos.
“When I consult clients, I start with their values,” says leadership expert Nicole Price, CEO of Lively Paradox, a professional coaching business. “I professionally believe that it was the right decision [by Southwest] to make amends for operational errors,” Price explains. “Southwest openly states: 'Our focus on people includes giving the same concern, respect, and care to each one of our people, whoever they are.'” And these values are said to be people over profit-based, not the reverse, she says.
“First and foremost, I want to apologize again to our customers and our employees for the impact the operational disruption had on them and all their holiday plans,” Southwest CEO Bob Jordan said on Thursday’s earnings call. “We are intensely focused on reducing the risk of repeating that type of operational event.” The company is focused on reimbursements and refunds, he said. Southwest has also given travelers affected 25,000 frequent-flyer points. “While I’m not proud of what happened, I am very proud of our people and all that they have done to take care of our customers and their needs,” he said.
Jordan has offered multiple apologies to customers and employees since the massive flight disruptions. The airlines canceled more than 16,700 flights from Dec. 21-31, he said on the call. On Dec. 20, Southwest (NYSE: LUV) closed at $36.39, and at $36.60 on Dec. 21. The low for the time period was $32.19 on Dec. 28. LUV closed at $35.70 on Thursday.
The first few days of disruption through Dec. 23 were specific to the winter storm, then Southwest began having additional disruptions in the operation on Dec. 24, Jordan said. The airlines had difficulty with crews and airplanes that were far from where they should have been. The software used couldn't keep up with the volume of changes resulting in manual crew scheduling, according to Southwest.
“It’s the CEO's responsibility to answer in this way as this issue wasn’t a financial one, it was an operational one," Price says.
Regarding finance, Price also listened to Southwest CFO Tammy Romo’s remarks on the call with investors and gave me her assessment. “What worked was that she stuck to the facts of the situation,” Price explains. “She shared those facts in a logical and reasonable way. The explanations did not sound like excuses—just explanations.”
Romo joined Southwest in 1991 and held several financial leadership positions before becoming CFO in 2012. The Q4 earnings results are “clearly disappointing and not where we expect it to be,” she said on the call. Performance leading up to Dec. 21 was “strong” and trending in line with previous guidance expectations, Romo said. Southwest generated a full year 2022 net income of $723 million, excluding special items, she said. The company has allotted $1.3 billion for a technology spend, which includes upgrades and ongoing maintenance of the system, Romo said.
A significant cost in the quarter was driven in part by "the estimated redemption value of rapid reward points offered to customers impacted as a gesture of goodwill and travel expense reimbursements to customers,” she explained. Romo said the balance sheet remains strong.
“I am immensely proud of the progress our people made throughout 2022 and their continued resiliency through numerous unexpected challenges, she said.
Price’s coaching has a particular focus on practicing empathy in leadership. “Investors struggle to concern themselves with empathy when there’s a profit loss,” she says. However, if Romo wanted to have a more empathetic response she could have reminded the audience of Southwest’s values and aligned the decision to compensate customers to those values, Price says. In addition, Romo could have “found a way to connect the intangible value of customer sentiment to projected sales (she mentioned March projections look good),” Price says.
Southwest is testing software fixes created after the operational disruption. The airline has also hired consulting firm Oliver Wyman to review its processes. Now that the earnings call is over, the next group of people Southwest's C-suite will need to talk to is the U.S. Department of Transportation, which has launched an investigation into December’s chaos.
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Have a good weekend. See you on Monday.
Sheryl Estrada
sheryl.estrada@fortune.com
