Flying Blind - Why Is Southwest Airlines Struggling So Much Compared To Other Airlines?
Now, in the case of Southwest Airlines over the recent holiday break there is an added reason they were such a disaster on top of how the way they approach structuring their business:
Software.
Namely, bad software and the havoc it can quickly accomplish.
In fact, both the problems this week with this week's FAA-mandated "full ground stop" and Southwest's holiday struggles both come down to software.
In both cases an old and perhaps even obsolete program not only failed to work properly but, more importantly, struggled to the adapt or handle the newly challenging conditions. They failed completely, in other words.
Southwest uses an old program called SkySolver to schedule its crews and which is reaching the end of its shelf life. It also isn't a complete "end-to-end" solution as it relies on other pieces of (equally old) software and very old technological infrastructure such as mainframe computers rather than cloud-based solutions.
The FAA's ground stop occurred because the Notice To Air Missions or NOTAM system, a service used to communicate to pilots about problems with runways, weather or simply communicating information to any flight, was corrupted. Specifically, the system failed when an engineer didn't follow procedure and accidentally replaced an important file in both the main and backup versions of the system.
Both the primary and the backup system were thus affected and both had to be rebooted necessitating several hours of being unable to communicate to any pilots which, of course, meant there couldn't be any new flights in the air.
Ouch.
But let us bring this back to first principles. On one level this happened because an engineer made a very unfortunate error. Meanwhile Southwest, faced with unprecedented weather at a busy time of year, simply couldn't handle scheduling so many new flights and get the right crews in the right places.
But, taking a step back, there is a deeper problem:
Both are relying on old software systems that themselves rely on old and increasingly outdated systems such as mainframe computers. This overlapping issues make these systems more statistically vulnerable to exactly these types of problems.
The question around this type of event was "when" not "if."
Now, why would an airline (or a critical government agency) use an old and rapidly outdated piece of software? Because it is cheap, of course!
Southwest was and is a "budget" airline and that means it cuts (legal) corners to try and give its customers the best possible price on their trip. Specifically, it makes decisions like preferring to fly point-to-point routes because it is cheaper to run than a hub-and-spoke model and it uses ancient and therefore very fragile software solutions.
Oops.
The point here isn't just that airlines like Southwest (and most certainly others) need better software. They obviously do.
But all of this investment will cost money. Considerable amounts of it. Southwest can't just upgrade SkySolver (for instance). They also have to replace all of the software it depends on for data and, ideally, also the infrastructure as well. They need a new SkySolver, a new booking system, and new cloud computing contracts rather than old mainframe computers.
This investment will be quickly measured in the billions of dollars. It is true that, over the long term, this capital may end up saving the airline company money because these fragilities can lead to sudden and significant one-off costs and fines.
For instance, the company estimates that this holiday SNAFU cancellation of more than 16,700 flights from Dec. 21 through Dec. 31 will reduce its pretax income by anywhere from $725 million to $825 million in the fourth quarter of 2022, resulting in a loss for the period. That includes between $400 million and $425 million in lost revenue.
Poof. Just like that the quarter's profit is gone.
But, over the short term these billions will, of course, have to come somewhere. In the end, money doesn't grow on trees and these costs will almost certainly be passed onto Southwest's customers. The cheap budget tickets of the past two decades will not be so cheap going forward. In fact, the whole era of cheap travel may be coming to an end, squeezed by higher wages for pilots and crew, higher fuel costs for planes and, also, higher expenditure on software.
What is the trade?
Long Amazon Web Services And Alphabet's Google Cloud and the short Southwest's profit?!
That might be a one but a bit sophisticated for the average retail investor. You could of course simply remove all the publicly traded airlines from your portfolio. As the Richard Branson quote at the start of this newsletter reminds us, owning an airline has, for decades, been a byword for a bottomless moneypit.
More broadly, the answer might simply be to expect some elements of higher inflation to stick around. The word "resilience" gets tossed around a lot these days. Everyone from President Biden down to this newsletter talks about how we need to "build back better" and part of that means a more resilient supply chain or sources of energy or cybersecurity etc etc.
All of this is true but another way to look at this new found fashion for "resilience" and the need for greater is to view it as requiring greater fail safes and therefore greater costs for each and every use. More expensive semiconductors, more expensive energy and yes, more expensive airline tickets.
Like the unprecedented bird flu causing egg prices to soar, hoping for these things to reverse isn't much of a strategy. Starting to plan your life (and your investments) around a new regime of higher inflation that much of the last few decades could be a start.
So, on a week where the positive news about inflation was very real and very welcome we wanted to remind you that, despite this positive news, hoping for a return to "the old way" of how things were may be a fool's errand.
Perhaps not as foolish as relying on a point-to-point airline during the holiday period but significant nonetheless.
*******
Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
