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 Thursdays 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 Im 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 couldnt keep up with the volume of changes resulting in manual crew scheduling, according to Southwest.
Its the CEOs responsibility to answer in this way as this issue wasnt a financial one, it was an operational one, Price says.
Regarding finance, Price also listened to Southwest CFO Tammy Romos 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 excusesjust 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.
Prices coaching has a particular focus on practicing empathy in leadership. Investors struggle to concern themselves with empathy when theres a profit loss, she says. However, if Romo wanted to have a more empathetic response she could have reminded the audience of Southwests 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 Southwests C-suite will need to talk to is the U.S. Department of Transportation, which has launched an investigation into Decembers chaos.
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Have a good weekend. See you on Monday.
Sheryl Estrada
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Big deal
A new Gallup report found that employee engagement in the U.S. saw its first annual decline in a decadefrom 36% engaged employees in 2020 to 34% in 2021. This trend continued into 2022 as 32% of full- and part-time employees working for organizations were engaged. However, 18% were actively disengaged, an increase of two percentage points from 2021 and four points from 2020. In 2023, companies can improve employee engagement by "keeping performance, collaboration, employee wellbeing, and the customer at the center of how work gets done," according to the report.
Going deeper
Here are a few weekend reads:
Ken Griffin credits Citadels historic $16 billion haul to one thing: Employees full-time return to office by Chloe Berger
Google CEO Sundar Pichai says he will take less pay this year as he joins JPMorgans Jamie Dimon and Apples Tim Cook in taking a compensation hit by Prarthana Prakash
The U.S. economy avoided a recession in 2022 because of shockingly resilient consumersbut theyre just about spent by Will Daniel
Playing cards and 5 other things you can do to slow down memory decline, according to major 10-year study by Chloe Taylor
Leaderboard
Here's a list of some notable moves this week:
Harmit Singh, CFO at Levi Strauss & Co. (NYSE: Levi) has been named chief financial and growth officer. As part of his expanded responsibilities, Singh will take ownership of corporate strategy and global retail real estate in addition to his current duties. He has almost 30 years of experience in driving growth for global consumer brands. Singh joined the company in 2013. In addition to his new areas of responsibility, he has accountability for the finance, information technology, strategic sourcing and global business services functions globally.
Ken Manget was named CFO at Canoo Inc. (Nasdaq: GOEV), an EV company. Ramesh Murthy, who served as interim CFO, will continue in his role as SVP of finance and chief accounting officer. Manget has years of financial industry experience on the buy and sell side, including running a multi-billion global equity investment strategy at Ontario Teachers' Pension Plan, according to Canoo. Manget has also originated and closed several billion of equity, debt and structured finance transactions while at BMO Capital Markets. Canoo has recently parted ways with at least eight senior managers, Fortune reported.
Matthew (Matt) Cagwin was named CFO at The Western Union Company (NYSE: WU), effective Jan. 20. Cagwin had served as the companys interim CFO since September 2022. Cagwin joined Western Union in July 2022 as head of financial planning and analysis. Before Western Union, Cagwin served as SVP and CFO of Merchant Acceptance of Fiserv, Inc./First Data Corporation and as SVP, corporate controller, and chief accounting officer of First Data. Cagwin also spent 10 years at Coca-Cola Enterprises in various roles.
Patrick Hallinan was named EVP and CFO at Stanley Black & Decker (NYSE: SWK), effective April 6. Hallinan succeeds interim CFO Corbin Walburger. He will resume his previous role as VP of business development. Hallinan joins Stanley Black & Decker from Fortune Brands Innovations, a home, security, and commercial building products company, where he served as EVP and CFO. He had a 17-year career at the company. Before Fortune Brands, Hallinan worked at Booz Allen Hamilton as a principal in the firm's automotive, aerospace, and industrial goods practice.
David Barry was named EVP and CFO at Fortune Brands Innovations, Inc. (NYSE: FBIN), effective March 2. Barry will succeed Patrick Hallinan. Barry has been SVP of finance and investor relations at Fortune Brands since April 2021. Before that, he was CFO and SVP for the companys water segment. He joined the company in 2015 as senior director of financial planning and analysis, strategic planning, and business development and was promoted to VP of finance in 2017.
David Rosato was named senior executive vice president and CFO at Berkshire Hills Bancorp, Inc. (NYSE: BHLB), the parent company of Berkshire Bank, effective Feb. 6. Rosato brings over 35 years of experience to the role. He spent the last 15 years with People's United Financial, Inc., eight of which were as CFO. Before joining People's United, Rosato worked at Webster Financial Corporation, including serving as its treasurer, and at M&T Bank Corporation.
Brian Roberts was named CFO at Splunk Inc. (Nasdaq: SPLK), a data platform, effective immediately. Roberts will report to Splunk CEO Gary Steele. Roberts brings 30 years of financial expertise. He served as CFO for Ozone Networks, Inc. (DBA OpenSea) as well as CFO of Lyft, Inc. Roberts also served as SVP of business development and strategy at Walmart Global eCommerce. Before Walmart, he served as senior managing director at Evercore Inc. and led the corporate development organizations at Microsoft Corporation and Inktomi Corporation.
Overheard
I think inflation is going to get sticky in midyear at around 4%.
Mohamed El-Erian, former chief economic advisor for Allianz SE, and the president of Queens College at the University of Cambridge, told Bloomberg on Friday.
