Southwest Airlines (NYSE:LUV) is preparing its report for post-market hours on Thursday, with operational concerns front of mind for the market.

The Texas-based airline’s Q4 report is expected to show a loss, with a $0.11 quarterly loss expected by the Street. That would reflect a retreat from positive reports in the prior two quarters of 2022 and the comparable period in 2021. Revenue, on the other hand, is expected to rise to $6.14B from $5.05B in the prior year quarter.

The carrier has beaten EPS estimates in 6 of the past 8 quarters, while besting revenue expectations in 5 of those reports. Analysts have slashed EPS estimates ahead of the report, with 14 separate downward revisions recorded in Seeking Alpha surveys.

Operational Issues Ground Earnings

Driving a large degree of the divisions were operational concerns that plagued the airline during the busy holiday season and lingered into January amid broader industry issues.

According to an SEC filing released earlier in the month, 16,700 flights were canceled over the holidays by the airline. As such, Q4 available seat miles for the fourth quarter declined by approximately 6% as compared with the fourth quarter of 2019 and necessitated a reduction in guidance. A pre-tax negative impact in the range of $725M to $825M and revenue loss of $400M to $425M stemming from the cancellations also shifted both management and Street expectation to a loss for the quarter.

The airline’s operational quagmire continued into early 2023 as a NOTAM outage impacted flights across the country. Amid these issues, Southwest (LUV) saw by far the highest level of delays and cancellations.

The airline remains under investigation by regulators due to the unusual level of flight disruptions.

According to Seeking Alpha contributor Tim Dunn, the impact of the flight cancellations are also likely to leave a lasting stain on the airline’s reputation. This could be a major adverse impact on full-year guidance for the Texas-based air carrier.

“Systemic and deep-seated failures caused expected but severe weather to cripple one of the world’s largest airlines,” he advised in a recent article. “Southwest damaged important relationships with its employees, customers, and regulators, all of which will take time to repair.”

A Strike on the Horizon?

The uncertain status of some labor agreements also hangs over the stock ahead of its earnings report.

Just days prior to the presentation, the airline’s pilots union set a timeline for a strike authorization date. The vote would be scheduled for early May, just prior to the busy summer travel season, if an agreement is not reached.

“Three years in the negotiating room, very little progress, a Christmas meltdown that has just defined what all of our problems are have led us to this decision,” Southwest Airlines Pilots Association President Casey Murray.

Seeking Alpha contributor Dhierin Bechai added that an agreement has likely been made more difficult by recent operational issues at the airline. While he does not expect a strike, he does anticipate negotiations to remain contentious.

“While I do believe that Southwest Airlines Co. will solve its issues and eventually reach a new labor agreement, it seems that at least for the time being Southwest Airlines management has made itself unloved with its customers as well as pilots as it abandoned the employee-focused approach also affecting customer relations,” he wrote in a recent piece. “Southwest Airlines Co. has an opportunity to undo that mistake now and it better use that opportunity to create value for all stakeholders.”

More positively, the airline reached an agreement with technicians and flight instructors in January. In December, the airline also inked a new contract with its customer service union.