Why You May Not Want to Fly Southwest Airlines

It takes years to build a reputation, but you can ruin one in seemingly a few minutes. At least that's what it looks like because, in reality, it's usually years of neglect and decay that explode in the singular "minute' where reputations are lost.

That's essentially what happened to Southwest Airlines (LUV) - Get Free Report during its holiday meltdown. It seemed like one out-of-control event that led to a massive failure, but we later learned from pilots and other insiders that a lack of investment in infrastructure helped create the perfect storm of events that stranded tens of thousands of passengers during the Christmas season.

DON'T MISS: Southwest Airlines Earns Dubious Honor (and You Should Be Worried)

Before its meltdown, Southwest had tied for second on the American Customer Satisfaction Index (ACSI) behind only Alaska Airlines (ALK) - Get Free Report. That's impressive for a discount carrier with a boarding process that's different from every other airline.

It's also a status that the airline could easily lose as customers will have the airline's "winter holiday flight cancellation fiasco" on their minds during the Memorial Day weekend holiday, according to Nir Kossovsky, author of three books on corporate reputation and CEO of reputation insurer Steel City Re.

“Surging measures of reputational risk,” Kossovsky said, “reflect uncertainty and a lack of stakeholder confidence. Even relatively minor problems will reinforce negatively shifting sentiment -- one more issue at a company about which they already feel uncertain -- and trigger outsized negative stock price reactions.”

Stock price, of course, doesn't really matter to passengers during a flight. but a damaged reputation could hurt the airline's bookings. Fewer passengers can lead to cancellations, schedule changes, and other problems that can snowball.

Why Reputation Is Everything for Southwest

Kossovsky did an email interview with TheStreet where he shared exactly why (and how) reputation has been important to Southwest.

“Southwest built its reputation and significant customer loyalty around customer service. Customers’ experiences during the winter holiday fiasco changed expectations, precipitating both a drop in bookings and a surge in booking cancellations," he wrote.

That has the potential to cause the travel disruptions mentioned above, and it could have a major impact on the company's stock price.

"Seeing this, investors’ expectations of Southwest’s reputation value also shifted, precipitating a second share price drop," he added.

Southwest is effectively under intense scrutiny both from its customers and shareholders.

“Any new disappointments are going to be viewed by stakeholders with reduced confidence. A company that disappoints customers repeatedly will push them from disappointment to outrage," Kossovsky wrote.

Southwest Passengers Have Lost Their Faith

You saw this in April when Southwest had a relatively minor outage that forced it to halt all flights briefly. The problem, which was triggered by a firewall issue, delayed about half the company's flights that day, but only a dozen (out of a potential 4,500 or so) were canceled.

In many ways, Southwest's systems worked. Its firewall led it to investigate a problem that was quickly corrected. Had the same thing happened to another airline, it might not have been a news story at all.

That shows the precipice the airline sits on now, according to Kossovsky.

"The company’s stock price and our measurements of reputational health indicate that if there is another incident, it will have a serious impact on Southwest’s equity value. And then, employee and executive recruitment and retention are follow-on effects of reputational crises, as people who used to think they were working for a ‘cool’ company, now begin to feel like they’re under siege," he shared. "Creditors and regulators are also paying attention, and that’s not a good thing in this case."