S&P Global Ratings said it would revise its outlook on Southwest Airlines from positive to stable due to operational losses incurred over the Christmas holiday.
Citing the airline's admission that it faces a pre-tax "negative impact" of up to US $825 million for the fourth quarter after around 16,700 flights were cancelled between December 21 - 31, S&P said the company will generate weaker funds from operations (FFO) in 2023 compared to previous expectations, which were for a return to pre-pandemic levels.
S&P said it was affirming its BBB issuer rating and warned a wider macroeconomic weakening, including a possible "shallow recession" in the US, could add to "demand uncertainty" for the carrier, though its low-cost model meant it could potentially ride out a downturn better than pricier rivals.
In a subsequent statement, Southwest said it was launching a range of one-way US $49 fares to run from mid-January to May 2023.
While the carrier retains "strong credit metrics and liquidity", S&P said it was revising its outlook as it expects it will be 2024 before the airline improves its FFO to the pre-pandemic level of US $3.5 billion.
Southwest's problems over the Christmas holiday were due to it operating a point-to-point network, unlike its competitors, who run more centralised hub and spoke systems, S&P said, noting that the company's crew scheduling software failed, meaning flights could not be manned.
On the positive, S&P said Southwest has maintained significant cash balances since the beginning of the pandemic, bolstering its liquidity through the issuance of primarily unsecured debt. "We expect the company will continue to generate positive cash from operations. We also assume elevated capital
expenditures, primarily related to the delivery of delayed Boeing 737 MAX aircraft and debt repayment", S&P added.
The S&P downgrade was echoed on January 11 by Susquehanna analyst Chris Stathoulopoulos, who, the company said, was cutting ratings on both Southwest Airlines and Allegiant Airlines as he views 2023 as “another transition year for the airlines”.
The analyst advised that order books and capacity guidance "are not fully de-risked as macroeconomic pressure on consumers escalates" and said investors should "take a more cautious tilt towards carriers most likely to maintain capacity".