Southwest’s credit impact due to flight cancellations manageable

(Reuters) – Ratings agency Moody’s (NYSE:) Investor Service said Southwest Airlines (NYSE:) Co’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.

A severe winter storm right before Christmas coupled with Southwest’s outdated systems caused havoc on the airline’s operations, causing over 16,000 flight cancellations between December 22 and December 31.

The Moody’s report, dated January 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.

The mass cancellations during the peak season for U.S. airlines will result in a pre-tax hit of $725 million to $825 million to quarterly earnings, Southwest said on Friday, having earlier forecast a strong profit.

The Texas-based carrier promised a thorough review of its operations after being criticized by unions and attracting scrutiny from the U.S. government.

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.