DoT fines Southwest Airlines $140m (and missed another $75m)

It took a year, but the US Department of Transportation (DoT) came for Southwest Airlines. Southwest will pay $140 million, including a $35 million fine, to settle a DOT investigation into last December’s meltdown that stranded more than 2 million travelers.

We have another Southwest Airlines story about the DoT to share with you. Unlike the meltdown, this story has a happy ending with zero costs.

We do a lot of data modeling. Crunching through the DoT data, we frequently find glaring errors – errors the DoT should pick up if they audit their data. However, they don’t do enough auditing and pick up glaring errors.

In early April 2023, we decided to try something different after being unable to get the DoT to fix annoying data errors.  We contacted an airline directly to ask about their data filing.  The airline was Southwest, and here is the story.

Background
US airlines must file operational data with the regulator, the US DoT. The main legal requirement falls under Section 329 (b). 49 USC 329_ Transportation information

These regulations provide some of the richest airline data to be found anywhere. For anyone following commercial aviation, this data cornucopia is an excellent place to find all sorts of aircraft and airline data nuggets. For example, regardless of which market one is focused on, the US DoT data arguably provides the best metrics, enabling an analyst to get a benchmark for almost every aircraft.

While the DoT datasets are very useful, they are prone to error. The most common error, in our experience, is airlines misfiling data. We have been building data models using DoT data since 2019 and found several anomalies.

When we found these and notified the DoT, we were given a polite response. But typically, nothing was done to fix the error. In one classic response to an inquiry about an obvious data error, we were told, “I agree with you, but not sure anything can be done about it.” This is the response from the regulator. This apathy is why the DoT missed another $75m in fines.

The regulator has tools to solve the problem. The agency’s webpage lists several fines imposed on airlines that have broken the law. Regulations allow the DoT to fine an airline $27,500 per day per report. That adds up quickly.

The Problem
We extensively use the DoT’s T2 dataset, which has valuable metrics that report airline operations. We noticed an anomaly in the Southwest Airlines data during a routine data model update. Here’s what we found.

The following chart should show all aircraft close to the 100% line – airlines do not fly their fleet on non-revenue operations if things are normal. The chart clearly shows that for Southwest from 1Q21, there was a problem – the MAX 8 (7M8) data was going way off, and the 737-800 (738) was also behaving unexpectedly. This was a red flag – something was not right.

Drilling down into more metrics in our data audit, we discovered more evidence that the Southwest filings were awry. The following charts illustrate the findings. We number three items that warrant special note. Remember, the MAX8 was grounded for several months, which explains the data gaps.

1. The first item is the ratio of air hours per day. We expect to see the fleet operate in a consistent pattern. After the MAX 8 returned to service, we saw it did not operate at expected levels.
2. The second item looks at flights per day. Once again, we expect to see a consistent pattern. Notice that for non-numbered metrics, all three models at Southwest operate consistently. Why would Southwest use a new, much more efficient model that is less fuel-efficient than its older models?
3. Finally, the kicker, in many ways, is item three. The MAX 8 is expected to perform ~16% better in fuel burn than its predecessor, the 737-800. Here, we see the MAX 8 with a shocking fuel burn. This is not just implausible – it defies logic. Would Southwest, an airline known to be very efficient, tolerate this performance?

We have more evidence demonstrating Southwest was misfiling data. The table lists the available seat miles per gallon of fuel. In US airline service, three airlines fly the 737-800 and the MAX8. The numbers listed for each airline and year show by what percentage the MAX8 is better than the 737-800.

Boeing and CFM (the engine maker) projected the MAX 8 would deliver 16% better fuel burn than the 737-800. It turns out that, in US service, it was a low estimate.

American and United show much better average fuel improvements. The Southwest numbers are glaring. Something is wrong.

The problem is identified.

Implications
We notified the DoT about this growing anomaly in February 2023. A reply from DoT concerning data filing errors noted: “Most if not all air carriers will not deliberately misfile their reports. Normally, if the carrier is continually late and continually has poor data quality, OAI can refer the carrier to enforcement, which does carry fines of $27,500 per day per report”.

There are, in our view, two main implications of a misfiling.

Soft Implications

• The goal is to improve ESG (reducing emissions)
  • A New York University study on ESG and financial performance notes “Studies indicate
    that managing for a low carbon future improves financial performance.”
  • McKinsey published an analysis noting, “Paying attention to environmental, social, and
    governance (ESG) concerns does not compromise returns—rather, the opposite.”
• Southwest Airlines reported fuel burn numbers are higher than they should be. An airline analyst shared this thought: “… the value creation, if any, would be in any reduced fuel burn that saved them money, increased operating income and margins.” Reporting accurate fuel burn numbers would be an upside for Southwest’s stock price. There is also a “halo effect” of showing customers that they are burning ~20% less fuel on a Southwest MAX 8.

The following table shows Southwest Airlines’ middling fuel burn per seat score. We believe the score would be far better if the MAX8 data were accurate. Southwest shareholders would see a far better relative performance, and customers will likely appreciate that their Southwest MAX seat delivers state-of-the-art fuel efficiency. Southwest is sensitive to ESG and files this statement (Comments of Southwest Airlines (SEC File No. S7-10-22) with the SEC.

Then, there is the value of accurate data for Boeing and CFM. Southwest is the largest US operator of the MAX family. Indeed, in 2023, the airline has been taking delivery of a new MAX about every four days. The relatively poor fuel burn for MAX 8s in the US DoT data directly relates to Southwest Airlines’ filing. Of the 362 active MAX aircraft in US service in April, 172 (47.5%) were with Southwest Airlines per ch-Aviation.

The following chart illustrates how inaccurate filing impacts Boeing and CFM. The MAX 8 is lighter than its main

competitor, the Airbus A320neo. Therefore, it should have a fuel burn equal to, probably better than, the A320neo. Whereas the A320neo shows a 23.5% improved fuel burn over the A320, the MAX 8 shows only a 16.5% improvement over the 737-800. The poorer improvement shown for the MAX 8 is directly attributable to Southwest’s inaccurate filing.

Hard Implications

DoT
Let’s look at the hard implications of a fine for misfiling data. As noted above, the DoT has not been reluctant to fine airlines for infractions of its rules. Generally, the infractions impacting consumers get the most attention. DoT data is less interesting to the media and consequently gets less attention.

But what if the DoT were to audit the Southwest filing properly? The T2 dataset is created from T-100 filings.

If we assume the $27,500 number as the yardstick DoT starts with, then based on the number of days after each filing period (typically 120 days after the period ends), we could see the following fines.

The dollar amounts were as of 5/16/23, and each period goes up another $27,500 daily. So, at the time, another $220,000 more, this time tomorrow. The numbers add up fast. The table lists the dollar amounts we estimated back in April.  Had Southwest not fixed the problem, we estimate the current fines could be ~$126.9m.

It’s too bad the DoT doesn’t pay enough attention and missed a big payday.

SEC
It’s not clear to us which DoT filings link to SEC filings. Almost certainly, the data files airlines produce for DoT are the starting point for SEC filings. Unlike the DoT, the SEC is more aggressive regarding inaccurate data. For fiscal year 2022, the SEC took 760 enforcement actions and recovered $6.4Bn in fines. Last year, Boeing paid $200m to settle an SEC charge on the MAX.

The process of Southwest filing data with the SEC, possibly based on data compiled for DoT filings, could put the airline at risk. Maintaining transparency and accuracy in financial reporting is a fundamental obligation of any public company to investors and the broader market.

Filing inaccurate data with the SEC can lead to several forms of “harm”:

• Investor Trust: Investors rely on the accuracy of this data to make informed decisions. If the data is inaccurate, it can lead to financial losses for investors and decrease trust in the company, potentially affecting its share price and ability to raise capital.
• Market Integrity: The broader market relies on accurate data for proper functioning. Misinformation can lead to incorrect pricing of securities, distorting market mechanisms.
• Regulatory Penalties: The SEC can impose severe penalties on companies that submit false or misleading information. These penalties include fines, sanctions, and restrictions on future business activities. In extreme cases, the SEC can also bring criminal charges against the individuals involved.
• Legal Consequences: Besides SEC action, inaccurate filings can result in investor lawsuits, which can have substantial financial costs and reputational damage.
• Reputational Damage: If a company is found to have filed inaccurate data, it can suffer substantial reputational damage, leading to a loss of business, customers, and investors.
• Audit Complications: If auditors later discover discrepancies in the financial statements, it might lead to restatements of the financials, which can undermine investor confidence and lead to legal and regulatory consequences.

A Perfect Outcome
Misfiling data has a long tail of impact. We are pleased to report all the implications described above are moot. The data anomalies are fixed, and the problem is solved.

Southwest’s response to our initial inquiries was positive, and we have worked through this issue.

Southwest’s Investor Relations team advised us: “We have discovered that the DOT code for our MAX8
ETOPS-equipped aircraft was originally set up correctly within our technology systems that feed our DOT
reporting, but the code was inadvertently changed in 2021 to reflect the 800NG DOT code. Teams are
still working to understand how this occurred and create new processes to prevent reoccurrence in the
future. Our Financial Reporting Team is working to gather the correct data and will then submit the
corrected data to the DOT. Thank you for bringing this to our attention.”

Today, we were notified that the airline refiled all its data with DoT.  The updated charts reflect plausible MAX 8 numbers.  Boeing’s best 737 customer is deploying its aircraft effectively, getting better range and fuel burn than the previous model.

We are delighted to have worked through this anomaly with Southwest! We hope other airlines will react positively and collaboratively when we contact them about their filed data.

Addison Schonland

Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.

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