I apologize for the disjointedness of this second portion of the blog.  I had written the entire piece (both part 1 and 2) a week ago- in one sitting. It was too long for a single blog, so I separated it to two. For those of you who attempted to view my blog yesterday afternoon, there won't be a surprise when I say that it had disappeared.  While I was able to recover the rest of the blog posts, this post was created right after the last backup- and was therefore lost.  I had to write a new version this morning in a hurry, to re-complete the analysis.

Yesterday, we began describing Southwest’s failure to protect it routes, its employees, and its customers when the bomb cyclone hit.

But, I want us all to consider the situation as not just what Southwest did or did not do the week of 22 to 29 December 2022.  Instead, we should examine and consider their attitudes and actions leading up to that fiasco and what that teaches us.

We should be able to discern how to prepare our own companies to better protect our stakeholders.   What sort of actions had Southwest taken (or not) that we should avoid or improve upon to ensure that we provide the best customer experiences possible.

For about a dozen years, Southwest had made cutting costs their priority.  Sure, we all want to be the low cost provider, because that means we can compete against all competitors and maximize our profits.  But…

A good portion of this Southwest philosophy was derived because of the way executive compensation is determined at Southwest.  And, it’s not just Southwest that uses this process (too many public companies use it, too), but perhaps the zeal with which Southest pursued it can serve as a warning against such compensation schema.

When cutting costs become the primary focus of an organization, it means that maximizing profits for a given revenue stream is the desire.  And, when profits are high, stock prices also rise.  Coupling that with Southwest’s routine purchase of corporate stock with its profits (to the tune of some $ 8 billion or so in recent times), also makes the stock price rise.  (It means the profit per outstanding share is higher, since there are fewer shares outstanding.)

This would explain how Gene Kelly managed to receive more than $ 9 million in compensation in 2020, despite the fact that Southwest had lost $ 3 billion that very same year.  (True, the compensation package was determined before the true effects of the pandemic were recognized, but with that kind of a loss, trimming compensation would be a most logical response.)

Moreover,back in 2018, Kelly made the decision that technology improvements and advances should be sidestepped.  Southwest also failed to install modern scheduling software for its crew and equipment.  Other maintenance issues were also waylaid.

(Maybe now is the time to note that Southwest has  committed this year to a new $ 135 million maintenance facility for BWI (Baltimore Washington International Airport).  This is now its fourth biggest station (the larger ones are Denver, Midway [Chicago], Phoenix; Hobby (Houston) is just a bit smaller than BWI.)  This will be its third such location [Denver and Hobby are the other two] in the US.)

In February 2021, Southwest announced yet again that it would forgo technology advances, including scheduling software needs. Which would somewhat explain the problems it faced later that year (October 2021), when weather conditions in Florida led to a four day snafu in Southwest operations.  While Southwest attempted to blame this solely on the weather, none of its competitors succumbed to such failures.  That snafu cost Southwest some $ 75 million.  (You can bet that making customers whole after the bomb cyclone snafu will render those costs seem miniscule.)

Here’s the real problem with that ‘delay’ philosophy.  Over the years, the various software vendors have upgraded their offerings.  But, those vendors really have not integrated said offerings with those of competing vendors.  And,  now, there are fully  integrated programs so that all the components easily communicate with one another.  When you don’t spend time analyzing and upgrading your operational software,  you don’t realize where the disconnects are.  That becomes even more important for growing businesses (Southwest had always been growing over its decades of operations), because there are more interactions.

As an example, years ago, we wrote our our software for accounting, customer service, and project management. It met our needs perfectly, since we knew who and what we are and could adjust our programs to our needs.  But, about 10 years into our existence, our company had grown from its original 5 founders to operations across the USA (in different locations), from $ 100K in first year revenue to a multimillion enterprise, from 2 or three customers to nearly 500.

Updating our software and management systems meant we needed to devote two of our best staff members to internal needs- forgoing the revenue generation (and management services) they could/would provide our firm and our clients.   We immediately began a search for systems we could buy that would pull us out of the development and management of that IT (information technology) effort and let us use the tools to better manage our business.  (Yes, the software was expensive-and not customized-  but the cost wasn’t terrible if we compared its price to what are two developers were being paid- and how much revenue they could (and did) bring into the firm.

Back to Southwest.  Bob Jordan took over the helm of Southwest on 1 February 2022.  One would have thought that Bob would follow the same concepts he used when he was first promoted to manage the merger of Air Trans and Southwest operations back in 2011.  I believe that would have led to a much better plan, avoiding the impending  failure like the one that devastated Southwest operations beginning 22 December 2022.

After all, Southwest had lost significant sums of money over the past two years (during the pandemic).  It also manifested serious dips in its “on-time’ reliability- but worse, it seriously eroded employee morale, according to its unions.  That’s partly why Jordan’s stated the business philosophy  for his first year as CEO was “back-to-basics”.   (And since Southwest had been neglecting infrastructure for years, no one really consider that a basic need.  Jeez.  Corporate blindness.)  Perhaps not coincidentally, those were the buzzwords employed in 1988, the fist year Jordan was a member of the board.

(Except right before the bomb cyclone hit, Southwest had also resumed paying a dividend to shareholders- some $ 428 million.  That should  have been used to update corporate technology.)

When Bob prevailed over the merger of Air Trans and Southwest, he worked hard to bridge his knowledge gap.  He followed the same script that had worked for him for his previous, unexpected promotions. First, figure out what you don’t know. Second, find people who know what you don’t. Third, let those people do their magic.

Using that process would have made it clear that Southwest needed to invest in and incorporate new scheduling software for its staff and equipment.  This lack of automation meant that Southwest wasn’t able to clearly discern where its staff was after the bomb cyclone hit.  They needed to rely on telephone calls to inform “scheduling” where the pilots and crew were.  And, it wasn’t just one phone call; it took many tries since the phones were too busy to let everyone get handled properly.  Moreover, without viable software, Southwest had to use paper systems to track its staff and crew and determine how to move the pieces around to resume normal operations. (That is actually why an extra two days- after the bomb cyclone was gone-  were used to move folks where they needed to be- blocking passenger transport at the same time.)

Now, back when we had our manufacturing operation, we applied 30% of our depreciation costs annually to effect maintenance and update our operational controls.  I’m not saying that 30% is optimum- perhaps a smaller or larger number would work for your firms, but we all need to ensure our infrastructure is maintained, allowing us to continually satisfy the needs of our customers and staff (the other two branches of our stakeholders).

We’ve seen that our esteemed Director of Transportation, Pete Buttigieg, has announced that he will be watching how Southwest compensates its customers for their travails.  And, stated that the system has ample means to penalize entities that don’t meet the required standards.  (The fine could reach about $ 10,000 per passenger episode.  Pete also was surprised that he had wider air time than did Bob Jordan and the rest of the executive management of Southwest.)

As would be true for most firms, handling the situation in house is preferable.  Even if those costs are high- because they would be deductible. Penalties and fines are not deductible to business entities.  So, there would be the costs of penalties, with full taxation of the profits – before the payment of the penalty.  (That is why most firms opt to avoid those penalties.

What should you be doing with your firm now to ensure that you can keep your stakeholders happy>