When investors heard the news about Southwest Airlines, they started selling.
Southwest's stock price dropped 6.6 percent, the biggest intraday decline in more than seven months. Other airline stocks quickly followed and the industry fell more than any group on the S&P 500 index.
But this wasn’t last week, when an engine blew during a Southwest flight and the debris broke a window, killed a passenger and led to an emergency landing.
The stock drop was a month earlier, after Southwest lowered estimates for a financial measure. Instead of revenue per seat mile increasing 1 to 2 percent, as initially projected, it would be flat for 2018.
That's hardly a bad number, given that Southwest had record revenue and record net income last year. But the update still rattled investors in the entire sector.
By comparison, Wall Street practically shrugged of the deadly mishap on the Southwest flight -- and the fact that the failing engine is a type that’s widely deployed around the globe. Made by CFM International, these engines have been powering jets for over two decades and are used in 6,700 aircraft around the world.
By the end of last week, the Federal Aviation Administration had ordered emergency inspections of the engines to look for fan blades that need to be replaced.
That sounds like a potential crisis. And the order came on the heels of some harrowing eyewitness accounts from Southwest passengers, including some who stepped forward to treat the injured.
But Southwest’s stock price ended the week just slightly lower than it began, down 30 cents a share -- or about half a percentage point.
Last month, after Southwest cut its revenue estimate, Southwest’s stock price fell 6.9 percent for the week. An industry tracker, the Dow Jones U.S. Total Market Airlines Index, fell by almost the same amount.
Wall Street is often criticized for overreacting to news and putting too much emphasis on the potential short-term impact. In that light, the response to Southwest’s engine failure is meaningful and even reassuring.
The smart money is betting there won’t be much effect on public safety, customer confidence and Southwest’s gold-plated brand.
“Southwest has such a good reputation with passengers that they’re being given the benefit of the doubt,” said Michael Davis, who teaches economics at the Cox School of Business.
The company has a strong safety record and last week's inflight fatality was the first ever from an accident. It responded to the incident aggressively, from CEO Gary Kelly speaking out at a news conference that day to sending $5,000 checks to passengers for unexpected expenses.
Southwest employees stayed in contact with passengers by phone and email, and one customer, Matt Tranchin, described the response as, "Friendly, understanding, concerned."
Southwest was respectful of Jennifer Riordan, the New Mexico resident who died on the flight, and tributes to her emerged quickly.
The pilot who landed the plane with one engine and a broken window was lauded for keeping her cool. After the flight, Southwest Capt. Tammie Jo Shults stepped out of the cockpit and introduced herself to passengers.
All airlines have a detailed plan for responding to such incidents, and the reaction from Southwest also comports with a corporate culture that’s famous for putting people first.
“I can’t imagine another airline surviving this as elegantly as Southwest,” Davis said. “There’s a halo that just seems to hover over the company.”
A year ago, a passenger was dragged off an overbooked United Airlines flight and the video went viral. While the action was outrageous, it wasn't in the same league as a fatal accident. Still, United's stock price dropped 2.6 percent that week, far more than the Southwest dip.
For a greater contrast -- and a reminder of the importance of safety in air travel -- consider the reaction to Allegiant Air’s recent troubles. The ultra low-cost airline, based in Las Vegas, had a plane skid off a runway in snowy Sioux Falls early this month.
Then 60 Minutes investigated the company's safety record for seven months and found over 100 serious mechanical incidents. They included mid-air engine failures, smoke and fumes in the cabin, rapid descents, flight control malfunctions, hydraulic leaks and aborted takeoffs, the news magazine reported.
Allegiant executives pushed back hard and said that safety was in the forefront of their minds and at the core of their operations. But in just over a week, Allegiant’s stock price fell almost 18 percent.
Analyst Hunter Keay of Wolfe Research said the stock is a buying opportunity, in part because the oldest, most troublesome plane models are being replaced late this year. But the news report will alarm people, he said.
“By no means are we taking it lightly,” he said about the overhang on the stock price and the likely negative impact on bookings.
He expects Allegiant customers will fly again with the company “based on their personal experiences.”
That same consideration -- personal experience -- is probably bucking up Southwest, too. For years, even decades, Southwest has been building up goodwill with the flying public, employees and investors.
“Wall Street is reacting to how passengers perceive the facts,” said SMU’s Davis. “Ordinary people are not overreacting.”
