Fitch: Delta, Southwest Computer Outages Highlight IT Importance
Delta's outage comes just weeks after a router failure caused Southwest to cancel some 2,300 flights over the course of several days. The heavy reliance on computer reservation systems and the interconnectedness of airline schedules means that even minor outages tend to cause ripple effects that affect the network well beyond the time of the initial outage.
Events like today's outage are not expected to have an impact on ratings. Fitch upgraded Delta to 'BBB-' in May 2016. The company has made material improvements to its credit profile in recent years as it has paid down debt, improved profitability and firmly established its ability to generate meaningful free cash flow.
Likewise, Fitch upgraded Southwest to 'BBB+' in October 2015, which places it among the highest rated airlines globally. Southwest's investment-grade rating is supported by solid credit metrics, a demonstrated ability to generate free cash flow its competitive position in the US domestic market, its strong brand and its sizable base of high-quality unencumbered assets.
In general, Fitch expects investment-grade companies like Delta and Southwest to have the ability to withstand unexpected events like these without harming their credit profiles. Only if IT problems were wider spread or were indicative of bigger problems could they negatively affect the ratings.
Financial impacts from events like these can be meaningful, as re-booking costs, overtime, etc. can compound quickly. While most of the operators in the North American airline industry, including Delta and Southwest, have the financial flexibility to tolerate events such as these without harming their credit ratings, outages like the ones reported in recent weeks can generate a material amount of negative press and ill will with passengers.
More serious IT problems can have longer term effects, as illustrated by United's outages experienced in 2012 and its effects on customer loyalty. Southwest's labor unions even used the recent outage as a bargaining chip in ongoing contract negotiations, stating that the company's aging IT infrastructure was reflective of management's focus on cutting costs. The company's management has pushed back against these claims, but the union's argument nonetheless generated negative attention.