Southwest (NYSE: LUV) has generally been a beacon of stability in the travel industry. The company has loyal passengers and it has famously had a good relationship with its employees.

Both of those have been strained, if not broken, during the past few months. First, there were reports of the company botching hotel reservations for flight crews sometimes leaving them stranded. Now, the company has been (reportedly) dealing with a pilot union that’s upset about vaccine mandates and an employee base that appears to feel overworked and underappreciated.

That has led to thousands of cancelled flights, which has a snowball effect that drags down customer satisfaction. Yes, Southwest has built up a lot good will over the years, but leaving passengers without a way to get where they are going burns that up fast.

Southwest’s problems are, perhaps, the most high-profile, but they’re not unique. The entire travel industry — airlines, hotels, rental cars, even theme parks — faces a unique set of operating challenges that makes the next few months very challenging.

Planning has become very hard

The pandemic devastated the travel business and the widespread availability of vaccines helped fuel a recovery during the early part of the summer. It was a comeback that happened quickly, which sent airfares soaring because airlines can’t ramp up capacity quickly. Rental car prices soared, too, because rental car companies had sold off some of their cars to pay the bills during the darkest days and the auto industry has few cars to sell them due to the chip shortage.

It’s a complicated mess with a lot of moving parts. Airlines, hotels, restaurants, and travel destinations tried to get back on track this summer. Once they began to bring personnel back and add capacity, the Delta variant hit and travel dropped again.

To give some personal perspective here, my wife and I own a Disney-area condo that we rent out when we’re not using it. We went from nearly fully-booked in July to no rentals in August or September. That hurt our wallet, but imagine how hard it was for the resort that houses our condo. Management had brought in new workers to staff the bar/restaurant and man the front desk to handle the increased volume — and then that volume disappeared.

That’s basically what happened in late summer across much of the travel industry. In addition, these problems were compounded by the pandemic forcing many travel companies to offer more liberal cancellation terms. Add all of these problems together and companies have to make guesses. Do you plan for the volume you might get or be cautious with your capital and hold off on hiring?

Both strategies can lead to major problems because you can either end up with too much capacity or not enough. Just right, of course, could happen, but it’s not that likely in a market where there’s so much uncertainty.

What does this mean for investors?

Travel industry stocks have always had risks associated with market conditions that companies can’t control. In this case, people want to travel and the holiday season looks encouraging, but should airlines, hotels, and other players bet their future that we won’t have another pandemic-related setback?

Staffing has become an issue for all industries, but it hits airlines hardest. You can’t just spin up a bunch of new pilots because demand increases. Add in the tense issues of vaccine mandates and/or working conditions and you can easily see that while the Southwest situation may be extreme, it’s not likely to be unique.

Of all travel industries, cruise lines have actually fared the best over the past few months because they are managing capacity in a way that has lined up with lessened demand. Nobody, however, takes a cruise to get from point A to point B, so even a cancelled or changed trip does not have the negative impact of widespread cancelled flights.

Airline tickets were expensive over the early summer as were hotels and rental cars because demand was high. In many cases, those have fallen, but paying a cheap price does not matter if your flight never takes off or you have a poor experience at your hotel.

Travel won’t be easy and it may not meet normal expectations through the end of the year when demand may increase heavily. As an investor, this may be the time to sit one the sidelines when it comes to most, if not all, travel stocks. What you can do, however, is sit back and watch how management handles the situation. Are they handling uncertain capacity well? Are workers being treated the right way? Is the situation (even when it’s not great) communicated well to customers?

The companies that navigate the next few months well are telling investors something that they should probably listen to. No travel business will get through this fully unscathed, but the potential places to invest will become clearer as you see how company leaders handle these unprecedented times.

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