Southwest shares drop as mechanics dispute escalates

(Reuters) – Southwest Airlines Co’s shares fell more than 5 percent on Wednesday after the low-cost U.S. carrier said it was investigating whether a conflict with its mechanics union was leading to a spike in flight cancellations.

The escalating labor dispute, one of the biggest to hit a top-four U.S. airline in more than a decade, comes amid a series of recent corporate headaches for the carrier.

Dallas-based Southwest was forced to delay its planned Hawaii launch due to the recent U.S. government shutdown and on Wednesday cut its first-quarter revenue growth forecast.

That followed news on Monday that the Federal Aviation Administration initiated a probe against the carrier in 2018 regarding weight and balance performance data.

Shares of Southwest fell 5.7 percent to close at $54.41 on the New York Stock Exchange on Wednesday.

The airline has canceled hundreds of flights since Feb. 15 due to a mixture of inclement weather and unscheduled maintenance issues that have put what it called an unprecedented number of aircraft out of service.

Southwest said there was no common theme among the maintenance issues, which followed the latest round of negotiations with the Aircraft Mechanics Fraternal Association (AMFA). The union represents about 2,400 Southwest mechanics and has been in contract talks with management since 2012.

Southwest Chief Operating Officer Mike Van de Ven said on Tuesday that the carrier would investigate why the number of aircraft unable to fly due to mechanical issues had doubled and said the airline remained committed to operating a safe fleet.

Last week the company declared an operational “emergency” and demanded all mechanics turn up for work.

AMFA disputed the carrier’s characterization of the maintenance issues on its website and said Southwest has the lowest mechanic-to-aircraft ratio of any major carrier.

“Negotiations and the degradation of safety culture are two entirely different items,” Bret Oestreich, AMFA’s national director, told Reuters.

The dispute comes at time when aviation deaths around the world have been falling. 2018 was the third-safest year ever in terms of the number of fatal accidents worldwide, according to the Aviation Safety Network.

Eric Schiffer, CEO of Reputation Management Consultants, said Southwest’s handling of the aircraft disruption had likely “highlighted a safety concern when there didn’t need to be one.”

“And whenever an airline is associated with risk, it impacts shares and sales,” Schiffer said in an interview on Wednesday.

American Airlines Group Inc is also in contract talks with its mechanics unions and asked for a federal mediator to facilitate negotiations last September. American’s mechanic contracts have not been updated since it merged with US Airways in 2013.

Southwest canceled 444 flights on Wednesday, about 20 percent of total cancellations across the United States, according to flight-tracking service FlightAware.com. It was not clear how many of the cancellations were due to weather.

The next round of mediated contract talks with the mechanics union is scheduled for March 12, Southwest spokeswoman Brandy King said.

Southwest said it had already enhanced a contract offer that the union walked away from last fall.

SHUTDOWN HIT

Earlier on Wednesday, Southwest said it expected a $60 million sales hit from the recent U.S. government partial shutdown, four times its previous estimate.

While the 35-day U.S. shutdown ended on Jan. 25, King said passenger demand and bookings continued to suffer due to uncertainty over a potential second shutdown before a government deal was reached on Feb. 14.

As a result, Southwest trimmed its first-quarter growth forecast for revenue per available seat mile to a range of 3 to 4 percent from a previous range of 4 to 5 percent.

Southwest, which flies more domestic flights than legacy peers like American, said it is hopeful that first-quarter demand softness is temporary.

However, the more than month-long hiatus in U.S. government decision-making has delayed the federal authorization process for Southwest’s plans to launch service to Hawaii, which it had hoped to begin early this year.

That process is currently under way, though the carrier has as yet been unable to announce a launch date.

Goldman Sachs said this means the airline will have a shorter window to sell tickets to Hawaii, forcing it to discount heavily at a time when most rivals expect an improvement in ticket prices. It issued a “sell” recommendation on the stock.