Southwest’s Old Technology Causes Big Headaches

A new reservation system can’t come a minute too soon for the airline.

A new reservations system can’t arrive soon enough for Southwest Airlines. The partial failure of a data router on July 20 led to an operational meltdown that caused the airline to cancel 2,300 flights over four days. “When the router failed, the data … piled up like a freeway traffic jam,” Chief Executive Officer Gary Kelly wrote in a July 29 employee memo. “Like it or not, we live with some old technology.” Other systems then shut down. Southwest fixed the glitch in about 12 hours, but the outage displaced aircraft and crews nationwide and stranded thousands of passengers.

The incident will cost “into the tens of millions” of dollars, Bob Jordan, the company’s chief commercial officer, told the Associated Press on Aug. 1. A Southwest spokeswoman says the airline has no further comment about the cost.

Southwest’s systems are a hodgepodge built internally and adapted to the airline’s needs over much of its 45-year history. Most large airlines use information technology platforms from outside vendors to manage everything from reservations to crew scheduling systems. For many years, Southwest had no need for such commercial platforms, given that its network differed greatly from those of larger carriers.

The operational glitches, plus what Southwest pilots in a statement called a “misguided focus” on stock performance, led pilots and mechanics on Aug. 1 to call for the airline to replace Kelly and Chief Operating Officer Mike Van de Ven, following a no-confidence vote on July 29. “As tenured employees and frontline leaders of this company, we can no longer sit idly by and watch poor decision after poor decision deeply affect our customers and Southwest Airlines,” Jon Weaks, president of the Southwest Airlines Pilots’ Association, said in the statement.

Three other labor groups, representing mechanics, flight attendants, and airport ground workers, joined the no-confidence vote, which singled out the IT problems. That meant about 36,000 of the airline’s 52,000 full-time workers backed the resolution. The pilots, flight attendants, and mechanics are in contract talks with Southwest.

The carrier’s leaders have “an inability to prioritize the expenditure of record-breaking revenues toward investments in critically outdated IT infrastructure and flight operations,” the pilots’ association wrote in a news release. Southwest’s senior vice president for labor relations, Randy Babbitt, called the union move an effort to pressure the airline. The move, Babbitt said in an e-mailed statement, is an “attempt to gain leverage in negotiations.”

The company is in the midst of a three-year, $500 million overhaul that will take it off its homegrown technology and onto a platform used by airlines around the world. The system, called Altéa, is sold by Madrid-based Amadeus IT Holding, an information technology company, and will allow Southwest to take advantage of scheduling and pricing techniques its larger rivals have been using for years. The airline will start rolling out the platform later this year, first with ticket sales. Its operations, including new automation for booking passengers during major storms and more mobile tools, will move onto the system in the first half of 2017, followed by additional enhancements later that year.

The Altéa system will allow for improved airport connection times—it will have more flexibility in how it schedules flights, eliminating long connections, for example—and additional seat inventory. It will also increase the carrier’s scheduling options. Red-eye flights, which current in-house technology can’t support, will likely be available in 2018, says Dave Harvey, Southwest’s managing director for business development.

The new capabilities could boost Southwest’s annual profit $500 million by 2020 and improve customers’ experience, executives said at an investor briefing in June. In a current domestic air environment where higher capacity and lower demand are pushing fares down, the revenue benefits of such large projects are often overestimated, says George Ferguson, an industry analyst with Bloomberg Intelligence.

Once the Altéa system is fully installed, the airline will be mindful of avoiding things that could alienate customers, Kelly told investors. But anyone watching shouldn’t expect Southwest to adopt industry norms it has long avoided, such as assigned seating and fees for bags.

“We think we’ve got a really great brand,” Kelly said at the June event. “We need to be really thoughtful about how we tinker with it.”

—With Mary Schlangenstein

The bottom line: Southwest Airlines says a planned upgrade of its IT systems could boost annual profit $500 million by 2020.

Before it's here, it's on the Bloomberg Terminal.