FINANCE | S&P downgrades Southwest Airlines outlook, expects weaker FFO

Global ratings agency S&P Global lowered Southwest Airlines Co's outlook to stable from positive, saying it expects the airline to generate weaker funds from operations (FFO) through 2023 amid the recent operational meltdown.

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"We now expect Southwest's FFO will not return to its pre-pandemic level of $3.5 billion until 2024," the agency said on Monday, adding that the Texas-based carrier faces a potentially weaker macroeconomic environment over the next 12-24 months.

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A severe winter storm right before Christmas, coupled with Southwest's outdated systems, caused havoc on the airline's operations, causing over 16,000 flight cancellations between Dec. 22 and Dec. 31.

Lingering effects from the operational issues and a possible decline in travel demand due to inflation could limit Southwest's ability to raise its fares to cover higher costs, S&P said.

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Separately, Moody's Investor Service said Southwest's flight cancellations during the holiday season will cost it hundreds of millions of dollars but the resulting credit impact would be manageable owing to strong liquidity and continuing demand for air travel.

Moody's, in a report dated Jan. 5, stated it expects ultimate costs related to refunds and compensations to passengers would be above $500 million, but the company's $13 billion of cash on the balance sheet and $10 billion in debt can give the airline crucial cushioning to manage costs and invest in operational efficiencies.

Moody's believes the impact on Southwest's passenger volumes and finances will barely be noticeable by this spring and beyond.

Last week, Southwest forecast a pre-tax hit of $725 million to $825 million to quarterly earnings due to the cancellations.

The holiday travel meltdown has tarnished the carrier's brand for now, but it will not permanently damage it due to the company's competitive pricing and generally reliable service across a majority of its network, said Moody's.

Source: Reuters

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