Southwest Outlines Plan to Avoid Another Meltdown

Edward Russell

April 3rd, 2023

Southwest Airlines will do everything from acquiring more deicing trucks in Chicago and Denver, to upgrading its internal technology and communications systems by this winter to avoid a repeat of its massive holiday flight meltdown.

In a report last week by the Dallas-based carrier’s board and independent advisor Oliver Wyman, Southwest outlined three broad areas where it is making improvements to avoid a repeat of last Christmas and New Year’s fiasco. Investments are focused in three areas: Winter operational readiness, technology, and internal collaboration. Of 13 specific actions, the airline has only completed three with the balance set to be done before the end of the year.

“With this plan in motion, we can move forward and focus on continuing to deliver the reliable operation, high-quality customer service, and legendary hospitality that Southwest is famously known for,” CEO Bob Jordan said in an email to loyalty plan members.

The report is the latest on what occurred when the airline cancelled more than 17,000 flights between Christmas and New Years and disrupted the trips of tens-of-thousands of travelers. The situation generated outrage among the public and officials alike, with even President Biden tweeting that the airline would be held “accountable” for the situation.

In the report, Southwest said it had refunded, reimbursed, and returned lost luggage to more than 99 percent of travelers affected by the holiday meltdown.

A timeline of Southwest’s holidays 2022 meltdown and recovery. (Southwest Airlines)

The cancellations, during one of the busiest travel periods of the calendar in the U.S., cost Southwest $850 million in the fourth-quarter alone and pushed it to a loss for the quarter — a period when most other airlines made money. It will likely accrue additional costs related to the event throughout the year, with analysts warning that some travelers could book away from the carrier in the first and second quarters.

At a U.S. Senate Commerce, Science, and Transportation Committee hearing in February, Southwest Chief Commercial Officer Andrew Watterson acknowledged that the airline had “messed up.” He described the carrier’s winter-weather preparedness as “insufficient” ahead of Winter Storm Elliott that affected a large swath of the U.S. in the days before Christmas, and precipitated Southwest’s meltdown.

The report affirms Watterson’s statements with most of its action items centered on improved winter weather operations. Southwest will acquire more deicing trucks, increase its stocks of deicing fluid, and secure more deicing “pads” — airport parking spots away from the terminal where planes can be deiced — in preparation for future storms. Investments will be focused at the Chicago Midway, Dallas Love Field, Denver, and Nashville airports. The airports are four of the eight busiest by departures in Southwest’s system; Denver is its busiest with up to 270 daily departures, according to Diio by Cirium schedules.

Whether the action items outlined are enough to avoid future meltdowns is unclear. Elliott, which stretched across the entire continental U.S. in the days before Christmas, affected operations at every U.S. airline but only Southwest was unable to recover. More winter weather preparedness will undoubtedly help the carrier, but the preventing operational distress takes more than just equipment, and the support of the entire airline. One only has to look to Delta Air Lines to see a carrier that has made operational reliability a company-wide ethos.

“This began with chronic ground support personnel shortages and excessive reliance on mandatory overtime, then cascaded into the flight and crew scheduling operations,”said Bob Mann, an adviser at R.W. Mann & Company and former airline executive. Southwest should have already known the answers in the report, he added, calling the engagement of Oliver Wyman a “virtue-signaling exercise.”

“Will it be enough? Time will tell … Planning is important, but ultimately, execution matters,” Mann said.

Somewhat surprisingly, technology investments are not the largest action item for Southwest in its report about the meltdown. The role of the airline’s crew assignment system, known as SkySolver, was an initial focus as a potential cause of the situation. The system, which did play a role among numerous other factors, was upgraded in February. Southwest lists two remaining technology-related action items: enhancing crew notifications and system recovery functions.

Southwest will make $1.3 billion in technology-related investments in 2023. The number, while up from roughly $1 billion in 2019, is unchanged from the beginning of the year.

Other areas where the carrier will make improvements this year include pulling down team silos, and enabling more coordination and communication. This should allow Southwest to better coordinate and respond to future operational crises.

“We will not allow a week in December to define us; but we will continue to learn from what happened and be better because of it,” the airline said in the report.

Edward Russell

Lufthansa Seeks Discount on Loss-Making ITA

Italy’s state-owned ITA Airways unveiled a massive net loss for 2022, amounting to nearly half a billion U.S. dollars. The company blamed heavy losses early in the year when Covid was still holding back travel demand, but also cited a worsening U.S. dollar-euro exchange rate, rising fuel costs, and the outbreak of the Russia-Ukraine conflict.

The losses are hardly a surprise. Prior to creating ITA in 2021, Italy’s government searched in vain for decades for a solution to the problems that plagued ITA predecessor Alitalia. Year after year, the state-owned airline lost extraordinary sums of money, burdened by high costs, labor strife, political interference, and relentless low-fare competition. During the global financial crisis of 2008, Rome privatized Alitalia, with a quarter of the airline winding up in the hands of Air France-KLM. Faced with bankruptcy a few years later, Etihad Airways stepped in with a large investment. This too ended in tears — Alitalia would file bankruptcy for a second time in 2017. Not long after the start of the Covid crisis in 2020, Alitalia was back under full government control. Officials subsequently shut the carrier down while passing some of its assets and employees to a new entity called ITA Airways.

According to Reuters, Alitalia — during the 11 years through 2020 — cost the Italian government nearly $11 billion to sustain. With ITA, the plan from the beginning was to privatize it as soon as possible. Despite the ugly legacy of Alitalia, several parties expressed interest, enticed by the prospect of capturing Italy’s lucrative longhaul traffic to markets like North America. For all of Alitalia’s many problems, one area of the company that typically performed well was its network of routes to the U.S., operated for many years as a joint venture with Air France-KLM and Delta. Air France-KLM and Delta, sure enough, were among those interested in acquiring a stake in the new ITA.

It was Lufthansa, however, that submitted a formal offer. In January, the German-headquartered airline said it would initially buy a minority ownership stake in ITA, along with options to purchase the remaining shares at a later date. But the offer was subject to negotiations about price and other matters. Those negotiations are ongoing. At an Airlines for Europe (A4E) industry event in Brussels last week, Lufthansa CEO Carsten Spohr expressed hope that a deal could be done before a deadline at the end of this month.

In the meantime, ITA will operate a spring schedule that features about 30 international destinations, including the U.S. cities of Boston, Los Angeles, Miami, New York, and Washington Dulles, all from Rome, according to Diio by Cirium schedule data. It offers New York nonstops from Milan as well, along with longhaul Rome service to Tokyo, Delhi, Sao Paulo, and Buenos Aires. ITA remains Italy’s second largest airline by scheduled seats this quarter, Diio shows. But it’s far smaller than Ryanair, which counts Italy as its largest country market overall. Ryanair serves just shorthaul markets within Italy and greater Europe.

As for ITA’s fleet, it currently flies 66 Airbus planes, according to Cirium Fleets Analyzer. Most are A320-family narrowbodies but for longhaul flying, it has seven A330-200s and six A350-900s. It has another 65 planes on firm order, including A320neos, A321neos, and A330neos. Its order book also includes A220s.

Naturally, Lufthansa is seeking a bargain price for ITA, whose net loss margin last year works out to a ghastly negative 31 percent. Spohr told Flightglobal that the losses need “to be reflected in the valuation.” The Italian carrier itself says revenues will show “further substantial growth” this year, separate from any takeover to which it might be subject. Management also promises “a significant improvement in the expected operating result.”

Lufthansa is not paying much attention to that. It surely understands ITA’s shortcomings and hardly sees it as a potential profit generator in its own right. The idea instead is that these shortcomings would be outweighed by contributions ITA could make to the overall Lufthansa Group network, feeding longhaul traffic through Frankfurt, Munich, Vienna, and Zurich, for example. It would also gain access to ITA’s loyalty plan and aircraft order book. Lufthansa currently owns a smaller Italian airline called Air Dolomiti, which could potentially be merged with ITA, thus further amplifying Lufthansa’s Italian clout. The German airline has said repeatedly that Italy is its second most important market after the U.S., excluding its home markets Germany, Switzerland, and Austria.

Jay Shabat

Avianca Unsure of Colombian Conditions on Viva Merger

Colombian authorities have tentatively approved Avianca’s proposed merger with bankrupt Viva Air under strict conditions following alleged antitrust violations by the legacy carrier.

Aerocivil, Colombia’s civil aviation regulator, approved the deal earlier in March with a number of conditions. They include resurrecting Viva, which shut down on February 27, as its own standalone discount brand; refunding tickets for all passengers affected by the shutdown; and giving up slots at the congested Bogotá airport to competitors. Most of these are the standard fare when it comes to mitigating the impact of airline mergers that concentrate capacity in the hands of one carrier or group.

But Avianca, after months of arguing its case to merge with Viva — and even offering some concessions in exchange for approval — is not simply accepting the approval and getting on with things. “We will analyze in detail the feasibility of conditioning in light of what is Viva today. That company no longer has the same capabilities in terms of route network, aircraft, and workers,” Avianca CEO Adrian Neuhauser said in a LinkedIn post following Aerocivil’s decision.

The key difference appears to be the fact that Viva is not a going entity anymore. Maintaining the brand would require restarting the airline and that would likely require more capital than Avianca budgeted for— capital that Avianca may not have following its emergence from U.S. Chapter 11 bankruptcy restructuring in late 2021.

But the harsh conditions come into a new light given the recent revelations that Avianca may have violated Colombian antitrust law in its takeover of Viva. Numerous local media outlets have reported that, following Avianca’s purchase of Viva early last year, it installed a board loyal to its own interests at the ultra low-cost carrier despite repeated assurances that it had no say over commercial matters at the airline. What’s more, reports suggest that Viva had several options to avoid the bankruptcy and shutdown that occurred earlier this year but the Avianca-backed board pursued a strategy that it believed would force Aerocivil to approve the merger.

Aerocivil made no mention of Avianca’s plan to merge with Brazil’s Gol under the new Abra Group holding company, or a South American equivalent to IAG in Europe. The creation of Abra would allow its airlines to better compete with the region’s largest carrier, Latam Airlines. Gol executives said earlier in March that Abra would officially be established in April, while the consolidation of both airlines’ economic interests in the group would take more time and antitrust approvals. In addition to Avianca, Gol, and Viva, Abra could also eventually include Chilean discounter Sky Airline.

All of these deals, plus an American Airlines investment in JetSmart and Delta Air Lines’ stake in and partnership with Latam, have made Latin America one of the most dynamic aviation markets in the world. United Airlines has a stake in Avianca following the airline’s bankruptcy.

Colombia is of particular interest to airlines because of its sheer size. The country is Latin America’s third largest aviation market behind Brazil and Mexico, according to data from regional trade group ALTA. In 2022, Colombian domestic passenger numbers were up 20 percent from 2019 levels to 47.9 million.

Aerocivil’s movement on the Avianca-Viva merger comes amid other changes in the Colombian market. Chilean discounter JetSmart, which is backed by U.S. private equity firm Indigo Partners, plans to launch domestic flights in Colombia following the receipt of a local air operators certificate earlier in March. JetSmart, which had expressed interest in acquiring Viva, dropped plans to buy Colombian discounter Ultra Air on March 23 citing “various factors.” Ultra Air suspended operations on March 30.

Ultra Air was Colombia’s third largest airline — fourth if including bankrupt Viva — by seats, according to Diio by Cirium schedules for March. Avianca is the country’s largest airline followed by Latam.

JetSmart’s launch in Colombia — it currently serves Bogotá, Cali, and Medellin from Chile — would add low-cost competition from a new competitor. That could help make up for the potential loss of Viva and Ultra if the latter faces continued difficulties. JetSmart would also stand to benefit from any slot divestiture by Avianca and Viva at Bogotá’s El Dorado airport.

Latam also continues to grow in Colombia. Earlier in March, it notified Aerocivil of plans to launch daily service between Bogotá and Riohacha, and Medellin and Miami with Airbus A320-family aircraft later this year. The airline, whose investors include Delta and Qatar Airways, plans to operate nearly 24 percent more capacity that touches Colombia in the second quarter than it did last year, Diio schedules show. Latam’s Colombia capacity in the period will be up nearly 40 percent compared to 2019.

Avianca, for its part, has said it can appeal Aerocivil’s decision on the proposed Viva merger. Until it either accepts the conditions or appeals them and receives a subsequent decision, Avianca said it is “not authorized to intervene in the operational or financial situation of Viva.”

Edward Russell

In Other News

  • The European Union’s Director General of Mobility and Transport, Henrik Holelei, stepped down on March 31 after an uproar over his acceptance of free flights from Qatar while the bloc was negotiating an open-skies treaty with the Gulf country. The free flights, which were uncovered by Politico, comes amid the larger “Qatargate” scandal in Brussels where there are allegations that Qatar bribed European Parliament lawmakers.
  • ALTA, the trade group for Latin American airlines, raised concerns about the situation in Colombia last week. The group highlighted high taxes, as well as the devaluation of the Colombian peso against the U.S. dollar and high fuel prices, for a 1 percent year-over-year decline in domestic passenger numbers in January. ALTA called on the Colombian government to significantly reduce value added tax (VAT) on airline ticket sales to help boost passenger numbers. The group did not draw a connection between the drop in passenger traffic and the subsequent closures of Viva Air in February and, now, Ultra Air. Viva and Ultra operated 22 percent of domestic Colombia seats, and almost all of the ultra low-cost carrier seats last year, per Diio.
  • Speaking of political fueled changes, Southern Airways Express‘ foray into the Northern Mariana Islands, Marianas Southern Airways, with Tecnam P2012 Travellers appears over after less than a year. The airline will end flights on April 1 after the governor of the Northern Mariana Islands, Arnold Palacios, cancelled its $8 million contract with the airline in February saying there was “just no money” for the deal. The contract had been signed by the administration of former governor Ralph Torres whose term ended in January.
  • On the labor front, United and the International Association of Machinists & Aerospace Workers (IAM) last week reached an agreement in principal for a new contract covering more than 30,000 staff at the airline. The two-year agreement, if ratified, includes wage increases, as well as bringing outsourced ground staff positions in Atlanta, Colorado Springs, Miami, Raleigh-Durham, and Salt Lake City in house. And two pilots union announced strike authorization votes last week: the Allied Pilots Association (APA) at American, and the Air Line Pilots Association (ALPA) at WestJet. Both votes will be held in April.

Edward Russell

Edward Russell

April 3rd, 2023