LUV - JETS: U.S. Airlines ETF Holds Well As Winter Storm Wrecks Airlines

Summary

• US Jets ETF has been holding well, due to diversified nature and relatively quick recovery of network for most airlines.
• Southwest Airlines is the negative outlier as its scheduling software cannot handle a remap of the network and schedules.
• Effect of winter storm disruptions will mostly dent Southwest Airlines results, with a relatively modest impact on other airlines.

Airline schedules of US operators have been wrecked in the past days by major disruptions due to the winter storm that is affecting large parts of the US and ripples through the network of US airlines. In this report, I will be looking at why the ETF for US airlines is holding relatively well, and I will analyze the problems faced and which airlines are most heavily impacted.

U.S. Global Jets ETF Holds Steady

Despite the significant disruptions to airline operations, the U.S. Global Jets ETF is holding rather well, trading down only 0.9%. This is one of those moments where ETFs can prove valuable as you are exposed to the risks, pressures, and opportunities for all names in the basket rather than the risks that a single name of the basket provides at a given time.

One thing to keep in mind is that the U.S. Global Jets ETF, while its name suggests otherwise, is not a pure US airlines ETF as it includes holdings in airlines outside of the US and jet makers. That provides a layering of protection against US airline-specific pains such as the winter weather that is being faced.

If we look at today's price performance amongst the U.S. airlines that are part of the ETF, we see that the US airlines that are part of the ETF representing 59% of the value saw declines in excess of the ETF performance with United Airlines ( UAL ) being the only airline in positive territory at the time of writing and Delta Air Lines ( DAL ) performs just slightly better than the ETF. The other airlines perform worse, led and dragged down by Southwest Airlines ( LUV ) which represents almost 11% of the net asset value.

A Look At The Schedule Meltdown

Updated with the most recent numbers available, we see that since writing about the surge in cancellations yesterday, cancellations for the 27th of December increased by another 833 flights while also tomorrow cancellations are set to continue as well as the day after. Slight positive: It seems the worst is behind us. Projected cancellations for tomorrow are at a multi-day low, but I can see that changing tomorrow as well.

I have mapped the cancellations for the airlines that are part of the ETF, and generally, we see cancellations peaked on the 26th of December, but the recovery profile looks vastly different for one airline in particular. I would start off by saying that American Airlines ( AAL ) had the least problems with cancellations, followed by Hawaiian and SkyWest. While JetBlue ( JBLU ) and United Airlines brought down cancellation rates in 3 days. More impacted were Delta Air Lines ( DAL ), Alaska Air Group ( ALK ), and Southwest Airlines ( LUV ). That is actually interesting because seemingly the airlines whose management approach I do like most have had the hardest times recovering their operations.

The airline that had an absolute meltdown is Southwest Airlines with over 10,000 flights cancelled, and keep in mind, the problems started days before Christmas. In total, nearly 26,000 flights have been cancelled and nearly 50,000 flights have been delayed. Southwest Airlines has a significant share of those cancellations.

While winter weather really does require changes to schedules for the safety of passengers as well as crews in the air and on the ground, it does seem that Southwest Airlines has internal problems with recovering its flight schedule. As an example, Denver tops the list of airports affected. Yesterday, 228 flights from Denver and 228 flight to Denver were cancelled. United Airlines cancelled 135 flights overall on that day while Southwest Airlines cancelled over 2,800 flights even though both airlines have similar market shares in Denver. So, the problem is not necessarily that the weather is hitting Southwest Airlines in its key markets, else we would have seen other airlines suffering cancellations in comparable quantities to Southwest Airlines, and that is simply not the case.

Southwest Airlines had various issues. The first one is that, at some point, they had no clue where some of their available crews were. Secondly, their crews and aircraft were out of sequence to handle the network. It is a cascading effect that after multiple delays and cancellations, your crews become unavailable and fresh crews are not available at the airport where the aircraft is available. After that they suffered from a technology shortfall in their system where they simply did not have the technological ability to match crews with aircraft as becomes apparent from a tweet from Dominic Gates from The Seattle Times:

I have received comments that weather in the US is much harsher than in other parts of the world, and as a result, I as a European could not provide comment on this. We are now seeing confirmation that the extraordinary disruptions are not necessarily weather related. Weather caused the disruption, but it was a shortfall in technology that caused things to spiral out of control for Southwest Airlines. You don't have to be from the US in order to understand that simple fact.

I covered the Southwest Airlines Investor Day earlier this month, and in its slide deck, Southwest Airlines highlighted its plan to reduce the impact of irregular events and causes of disruption. The planned roll-out of that is 2023. So, it seems Southwest Airlines was extremely well aware of the technology shortfall for its network scheduling but they have not rolled out in time. They are planning on doing that next year, but for the customer confidence lost through this winter storm, it is little too late I would say.

History doesn't repeat itself, but it certainly does rhyme, and this is not the first time that Southwest Airlines has seen disruptions due to technology in its network. There has been one instance where the FAA ordered a ground stop due to incorrect weight data for the aircraft entered into the system which grounded 130 aircraft, and last year, Southwest Airlines cancelled 2,000 flights over four days due to bad weather, air traffic control staffing shortages, and not enough staff available to recover the network in a prompt manner. It cost the airline $75 million, so the current issues are likely going to cost the airline hundreds of millions and a dent in customer confidence in the airline. What we see is that, for the complex network Southwest Airlines operates, its technological capabilities to remap and restart the network after a disruption are virtually non-existent and this is not new to Southwest Airlines as they suffered the pain of that before.

Front-desk workers at Southwest Airlines and crews on the tarmac and in the aircraft can work as hard as they want, but if the technological capabilities are not there to recover a network, you are looking at an escalating matter that requires time and many non-revenue flights to reposition aircraft and restart the network.

Conclusion: JETS ETF Holds Well, Technology Shortfalls Are Prominent

Bad weather happens all over the world, and while the winter storm in the US is one that likely is not seen by many before, the fact that tens of thousands of flights will end up scrapped is not so much because of the weather. Certainly, the weather did cause disruptions, but technological shortfalls at Southwest Airlines caused the number to spiral out as the company does not have the technology available to quickly recover its operations after a disruption and that is why one airline accounts for over 80% of the cancellations since Christmas.

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