Does the Southwest Meltdown Prove ERM Haters Correct?

Most of the time, flight delays and cancellations are just an inconvenience for a small number of people.

That cannot be said about the recent “meltdown” of Southwest Airlines’ operations over the Christmas 2022 holiday. While the intense winter weather gripping the U.S. affected all airlines, the impact to Southwest was especially severe with close to 17,000 flight cancellations between December 21st and January 2nd.

To put this into perspective, at the peak of the storms and delays, Southwest had nearly 3 times the number of cancellations than all other airlines combined!!

Consequences of this crisis are starting to materialize. The airline expects to lose around $825 million. Fines and class-action lawsuits could push this total well over $1 billion. Congressional oversight committees are promising hearings, so don’t expect this story to go away any time soon.

Southwest will not only be dogged with regulatory and legal challenges; this crisis will haunt the company’s reputation for some time to come as the following Tweets show.

And in the heat of a moment like this, a little comedic relief is in order…

This isn’t the first-time computer glitches and technology meltdowns have caused massive disruption to the carrier’s operations.

In my blog’s very first post published on Sept. 1, 2016, I wrote about another computer glitch that caused over 2,000 flight cancellations during the busy summer travel season. And even since this article was published, the company suffered another breakdown in October 2021 that again caused over 2,000 flight cancellations and $75 million in lost revenue.

According to a report in Travel Pulse, the pre-Christmas Day winter storms in 2022 pushed the company’s antiquated computer systems well past their breaking point. As a result, pilots and crews were not re-assigned and mountains of luggage lay in wait in airports from sea to shining sea.

Like so many companies in their early stages, Southwest could get away with postponing investments in adequate IT infrastructure for a while.

But I was stunned to learn that up until 2017, gate agents, ground crews, and other personnel would communicate using paper slips sent through pneumatic tubes like you would see at a bank drive-thru. (Ironically, this Consumerist article includes an indication from the COO that the new technology will allow Southwest to “bounce back faster from storms”…Hmm.)

It should be abundantly clear after this latest debacle that the company is well past the point where technology, or lack thereof, is a real hindrance to its success.

While I could go on (and on and on!) about those tech malfunctions, that is not the point of today’s article. The stories above and others provide a great overview of what happened.

The central question for our purposes today is…

Does this situation prove ERM is not able to meet today’s business challenges?

On paper and from a process perspective, it would seem the Southwest’s ERM program and general risk management was quite robust. The company was well-known for hedging jet fuel costs (financial risk mitigation) for many years. We actually prepared a brief case study of their program a few years back. Also, I once heard their Internal Audit Director discuss the company’s risk program at a NC State Roundtable event.

As we see unfold in this situation, a well-established ERM program doesn’t necessarily translate into sound decisions in today’s world.

I’ve said it often in the last couple of years, especially in articles on risk appetite, that a company cannot be fixated on reducing or mitigating risks at the expense of long-term resiliency. Reading about this situation over the holidays serves as a stark reminder of this fact – if you try to minimize risk in all areas, you will end up running the company into the ground.

Norman Marks illustrates this point well vis-à-vis technology in his book Making Business Sense of Technology Risk when he says:

Waiting to implement new technology, such as manufacturing systems connected to the Internet, until the cyber risk is considered low means that the organization will likely fall behind its competitors…In the old days, we used to advise management not to be on the “bleeding edge.” Today, organizations have to be more prepared to take the risk. Just look at the examples of Blackberry, Kodak, Motorola, Borders, and the like. They failed to take the risk and suffered the consequences.

Therefore, while Southwest’s risk management may have once been considered robust at mitigating financial risks and avoiding failure in general, it ended up doing neither.

This situation is a prime example of why a company shouldn’t evaluate an ERM program against “best practices” and standards, but rather against whether ERM is meeting the company’s needs or not.

And this point leads us to our initial question – does the Southwest debacle prove ERM haters correct?

On the surface, it would seem that it does, but I think the answer lies more in how the company went about ERM and what it chose to focus on.

Instead of leveraging its capabilities and strengths to take measured risks and create a competitive advantage, the company instead chose a scarcity mindset and risk-averse approach. This is a pity, considering how Southwest was once one of the most well-regarded airlines in the industry.

For the sake of its employees, customers, and shareholders, I hope the company can learn from this debacle and emerge stronger. But as long as it focuses on just minimizing risks, it may not survive the decade amid general macroeconomic challenges coupled with a turbulent (no pun intended) industry.

Does your company use ERM to take measured risks in pursuit of strategic goals? Or is your company focused in risk mitigation and risk avoidance?

I can imagine there are many different perspectives to this story. To share your thoughts, please feel free to leave a comment below or join the conversation on LinkedIn.

Also, if your company is only using ERM as a tool for minimizing risks but want to see how ERM can be leveraged for so much more, please don’t hesitate to reach out to me by visiting my contact page or schedule a meeting to begin discussing your company’s situation.

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2 Comments. Leave new

  • I don’t think a definitive answer to the question posed can be provided without seeing the results of technolgy based ERM reports. If findings were not identified and recommendations posed regarding their antiquated technology, I would argue their ERM program is far from “robust”…

    Reply
  • Anthony Krone
    February 2, 2023 6:01 am

    I reviewed Southwest’s ERM portfolio and it looks real pretty on paper. I think it’s a cautionary tale of what may look good on paper for investors and regulators is meaningless if you’re not actionable. The gray rhino was staring them in the face.

    Reply

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