Their market cap today isn't what matters - if people forget about this and continue to fly Southwest (which, let's be honest, many will), their share price will recover when they announce earnings.
The reality is they save a lot of money by keeping virtually no slack in their system and not doing things like scaling up customer service during the holidays. If they lose some money in flight cancellations, it's still rational for them to operate like this. Plus the reality is they probably won't actually lose much - most people whose flights were cancelled will still end up taking Southwest because it's too expensive (or not possible) to book last minute tickets on other airlines. That means they just push them into the very end of Dec/early Jan when they have open capacity anyway.
I think that's right. Customers have decided that maybe getting charged a couple full fares once every ten years is better than spending 10% extra on every ticket.
Which makes sense. The airlines have decided this as well.
While the capitalist in me agrees with you that this is one the market can sort out (and believe me, I'm going to pay more to not fly Southwest moving forward, at least for 2023), I do think that this is just a case where people are bad at making that calculation. I suspect most people would pay 10% more for even a relatively small reduction in likelihood of this kind of thing happening at Christmas, given the potentially huge costs if it does (missed time with family, being stuck in an airport for days with children, lost payments for hotels and other activities, etc.). People are generally quite poor at properly factoring in low-probability, high-impact events into their decisions, and I think that's happening here.
Now whether the government should step in to protect people from that bias is entirely another question. I would argue yes, but I can very much see the other side that would say to simply let the market sort it out.
> if people forget about this and continue to fly Southwest (which, let's be honest, many will), their share price will recover when they announce earnings.
Well, if you believe this, go buy their stock (LUV). The market disagrees.
I very well may buy some LUV depending on where they end up over the next few days. Remember the Equifax security breech that should have destroyed the reputation of that company in 2017?
Here's some historical stock prices
9/1/2017 $134.64 - everything's fine
9/15/2017 $87.99 - scandal breaks and hits the news
Yeah, I actually did really well after the Deepwater Horizon buying BP stock at the bottom, since the amount of value it lost in market cap exceeded the largest fine in history plus the cost of all the damage and lost oil by something like an order of magnitude.
That said, while in theory I actually think LUV is a decent trade right now, broader market conditions will keep me from messing with it.
The reality is they save a lot of money by keeping virtually no slack in their system and not doing things like scaling up customer service during the holidays. If they lose some money in flight cancellations, it's still rational for them to operate like this. Plus the reality is they probably won't actually lose much - most people whose flights were cancelled will still end up taking Southwest because it's too expensive (or not possible) to book last minute tickets on other airlines. That means they just push them into the very end of Dec/early Jan when they have open capacity anyway.