Southwest Airlines has been under attack by investor group, Elliott Investment Management, and succumbing to that this week just killed the airline. Here’s why.
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Elliott Kills The Golden Calf
Southwest Airlines has announced its latest and most substantial change, eliminating its inclusion of free checked bags with every seat sold. The Southwest checked bag policy has changed from “bags fly free” to on some fares, up to two bags may fly free but for the cheapest fares no checked luggage is included.
The airline not only avoided charging for checked luggage when every other US carrier did, but it made it the sales pitch of the company. Despite my insistence over the last decade that even when including the checked luggage charges, Southwest was still more expensive than other US carriers, its customer base has been steadfast (and perhaps blind) in its loyalty to the carrier. Refutation of any claims that Southwest wasn’t the best value on the market was met with pitchforks.
Consumers were willing to look past fare increases and other deficiencies because they hate fees and love the culture of the airline. But without that advantage, the airline is going to face comparisons it has been able to avoid to this point.
For what it’s worth, I predicted in July that the airline would start charging for bags and some were certain that wouldn’t be the case.
Why You Can’t Treat Southwest Like The Other US Carriers
Putting aside for a moment the traditional cost benefits of Southwest and its service, the carrier has some deficiencies that others don’t – some of them are glaring.
All Boeing 737 Fleet
Its single aircraft type, the Boeing 737, limits the airline in a few ways. It can’t fly to markets that are unable to support its smallest variant, the 737-700 (or MAX-7) even for expensive connecting traffic. It also limits the frequencies it can operate, for example, United might fly four E170/175s from Pittsburgh to Houston but Southwest would have to run that with just two frequencies as its jets hold twice as many passengers.
The single aircraft type also limits the carrier’s range so growth remains solely in North America unless it tries a stretch flight from very far northeast US to the western-most European destination. It will, of course, find competition from JetBlue, Iceland Air, and if trying to expand to South America, Copa and Azul would put up a fight too.
Onboard Experience
Lack of onboard amenities like seat-power and in-flight entertainment screens make long flights less attractive than competitors like Delta who have made this a point of emphasis. On top of that, the carrier doesn’t have ovens that can support food for sale nor food as a value add for higher fares. That’s a limitation that some customers will not be able to overcome. That’s not to say that customers choose an airline because of the food – they don’t – but for longer flights, peanuts and pretzels won’t be enough.
Partners
With just one international partner, Iceland Air, and no domestic partners, Southwest has a very real wall for its customers. American, United, Delta, and Alaska have many international partners, but so does JetBlue. For Southwest, it could point to Frontier, Breeze, Spirit, and Allegiant who don’t have significant partners either but that doesn’t really match the size of Southwest and its ambitions.
Right Intentions, Wrong Approach
Elliott Investment Management has pressured the company to perform and identified areas where it’s falling behind competitors. Opportunities for ancillary revenue like charging for checked bags will do two things: 1) it will generate revenue for those that continue to travel with checked luggage, and 2) will reduce fuel burn for those that might have been overpacking because it was included, but change their approach when it costs more money.
The airline has not been performing to the same level as peers, but perhaps that comes down to its limited footprint, or lack of partner destinations and inventory. Southwest customers still fly to Europe, South America, Canada, and throughout the Caribbean in destinations the carrier doesn’t serve – they just fly someone else.
Adding luggage fees assumes the underlying constant (fares, and passenger volume) will remain the same but it will not. By charging for seat assignments, reducing the value of the loyalty program, and turning heel on its most famous value-add, the carrier will certainly lose business of clients that were willing to accept a less frequent schedule or didn’t put them right in their target airport because they could fly their bags for free. They were willing to absorb higher prices because they factored in the cost of their luggage on other carriers and like the privilege of not doing the math at the airport.
Elliott was right that the stock was not performing to the same degree as some of the other US carriers and that for its size and market scope, it should be more valuable. But that also assumes the airline is more or less a commodity as American, United, and Delta have become. It doesn’t have the entertainment options of Delta, doesn’t have the frequency convenience, it doesn’t have partners that add value where Southwest can’t or won’t. What might have been a superior product for domestic road warriors and infrequent leisure travelers, just became as common as the others. The carrier has given away its competitive moat. That means it will need to compete on price which will drive margins down even further.
Conclusion
Setting aside the Southwest culture, the airline gave up on why its customers choose the airline even when it’s not the best option available for them. And, unfortunately, it will cost the airline, its passengers, its staff, and its shareholders dearly. Southwest had exclusively direct sales in a time when no carrier does. It gave that away over the summer too. The only reason to choose Southwest now is price or schedule, and that assumes that you ignore the limited options onboard. Elliott might have wanted to improve shareholder value, but it’s clear that it didn’t fully grasp the rest of the market and why Southwest can’t compete without its (nor former) core advantages. As the kids say, (paraphrasing) Elliott has messed around, soon they will find out.
What do you think?
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Kyle,
On behalf of all the readers here: DUH!
@Steve – In fairness, I was told 9 months ago when I called it out that it would never happen.
Well then they’re as blind to the obvious as Tim Dunn is to anything Delta does wrong.
I always compared them to other carriers and they were always more expensive. Constantly delayed with no interline agreements, people cheating the system to get on the plane first, their rewards program couldn’t get you out of the country etc. Never saw the point of southwest other than people that have no choice with other airlines. It’s crazy people are freaking out over this airline. Maybe if they would have added another fleet type to make them viable internationally.
Same here, never had a reason to pick them, or even the other ULCCs, over DL and UA. Not just price, but also scheduling. The legacies just work better for me.
I used to be a committed SW passenger. Never checked anyone else’s schedule or fares!
Now all the airlines are on a level playing field and I will be an uncommitted frequent flyer. ;(
Kyle, concur with your assessments. Basically, the niche they owned in the market and yanked the rug from under their own feet. I was never a Southwest fan and now I have even more reason to never fly their airline. Let’s see how long they last until (1) they back peddle and change their baggage policy, (2) are purchased by a bigger fish or, (3) kill their own business.
Sadly I’m afraid t’ll be #3. I’m a multi-decade emloyee now retired. It seems as tho the vaunted strengths of the past – enduring profitability, the system concept and relative simplicity, etc – after-burnered SW past the downturns and bankruptcies so prevalent 15, 20 yrs ago in the rest of the industry. Changes that other carriers made then, and improved upon, to their operating designs and the services they offered their customers now are much more expensive to imitate. The discussion about the 737 is pertinent. The monthlong December Meltdown is not ancient history. I’m not seeing how the army of consultants and outside vendors SW has pivoted to can form a cohesive and customer-attractive operation. Gary Kelly seized a fortuitous opportunity in the 90’s that became a springboard to great success. 35 years on, the only way to avoid the fire sale will be the miraculous appearance of more manna from above.
Among the other advantages of flying Southwest was their very liberal cancelation policy. With Southwest, you didn’t need trip insurance. If you had to cancel at the last minute, you could bank the funds and use them later in the year. Southwest has already announced that this will be changing and the window for re-use will be reduced. Couple that with the new bag fees, the limited schedule, the fact that it basically takes all day to get anywhere except Chicago, Baltimore or Denver, and the fact that existing travel points have pretty much become worthless, and even a 17-year loyal customer like me now has to look at them as just another cattle car with wings. Sad. Businessmen today are not very bright.
Began flying almost solely SWA since 2008, flying a round trip, non-stop between BWI and Milwaukee. Was fast, efficient and affordable. Enjoyed all their perks and high energy, quirky flight attendants. Became a rapid rewards member in 2010. Always made a point of flying SWA even though they did fly to less convenient locations for me. HOWEVER, now that they have chosen to be just the same as AA, Delta, Alaska, etc. I’ll just fly those airlines as they won’t be anymore expensive than SWA and they can provide more convenient airports and have onboard amenities SWA doesn’t have on their 737’s, an efficient but BORING aircraft to fly. Don’t have a lot of rewards points, 33,000, but will be cashing them in for gift cards on the SWA website, so thank you for providing that perk. The last one I’ll ever use. BUH-BYE SWA!
I was WN’s top flier two years in a row. They used to have super low fares for short segments. $29 or 59 PHX-LAX or LAS or SAN, so I would commute every day.
Companion Pass along with free flight coupons for wife & son guaranteed that all of our domestic travel was on WN.
No desire to even look at WN for pricing now. It’s another Spirit or Frontier now. Ugh!
Stick to what works for longevity. Greed kills the long-term for the short sighted.
PS Gary Leff is a fat clown.
The Final Boss at Elliott, Paul Singer, is 80 years old, so he doesn’t have much time left to destroy Southwest to increase his already gargantuan net worth, so maybe that explains the urgency.
This will just be another case study about a company that refused to adapt to industry trends and introduce new innovations (let alone upgrade their technology…. i.e. the Dec 2022 meltdown).
Recently flew SW with lots of large bags, having arrived from out of the country. It’d been many years since returning to California, where there were now more airline choices, but when our luggage was factored in SW had the best price. I guess that won’t be the case next time.
Elliott management had shown with absolute certainty that they have no clue what they are doing. They killed the goose that laid the golden egg
Their investors should be running for the hills.
Sadly they are the definition of everything wrong with wall street.
WN is heading to bankruptcy with Elliott management driving the bus nonstop.
Elliott owns a shade over 10% of the stock, so you have to wonder why the company is kowtowing to their monumentally ignorant demands that will ultimately damage the business. Firms like Elliott are truly “vampire squid” attached to the faces of well-managed companies with proven track records, and sucking the very life breath put of them for short-term profits. Calling them scum is too complimentary.
It appears that Elliott has done the functional equivalent of a hostile takeover of Southwest. I do not expect this to end well for Southwest. Frank Lorenzo took over Eastern Airlines in the mid or late 1980s. Carl Ichan did the same with TWA in the 1990s. Those airlines went in and out of bankruptcy. Neither of those once great airlines exist today. Eastern simply went belly up, out of business altogether. TWA was bought out and merged with American. I expect it to take several years for events to fully play out before the final demise of Southwest.
What Elliott is doing ought to be illegal. Congress ought to pass legislation to ensure that nothing like this could EVER happen again. Perhaps it is time to abolish the stock market, just shut it down. Permanently.
For sure, having a fleet limited to one aircraft type restricts WN but what about the benefits: how does having a simplified fleet feed into operating costs per ASK?
Southwest started by shuttling business travelers between Love and Hobby, and I think that’s their core market: simple, convenient, reliable shuttle service with lots of frequencies in short to medium segments. People who want to get there and back in a day, spend no time at the airport, and not worry about catching the next fight if their meeting runs long. These people don’t check bags, and even if they check bags they’ll likely be paying fares that still include checked bags. I struggle with the notion that there is a vast market of leisure travelers who will pay higher fares at WN, rather than paying checked bag fees at any other airline. I’m sure such people exist, but I doubt it’s a core market for them. As far as culture is concerned, the people of the airline make the culture, and bag fees haven’t changed that.
Flew WN since they went into MDW. Took one for the team flying Business select ostensibly for points somtimes eschewing FC on another airline. The good news (now) is that old points don’t expire and I built up a lifetime of travel. That said the revamped point system is a disaster- who will care to have even BS points (no pun intended) last for 12 mos.? I always thought that upping the BS game might allow some growth but this is going the wrong way. Good luck WN and welcome to the real world of bean counter destruction.
I’ve been a Southwest customer for over 50 years, and I’ve seen them whip Braniff, kill off several other startups, and create the most enjoyable flying experience in the air. All under the original crew hired by Herb Kelleher.
When Gary Kelly took control, the SW Rapids Rewards – 8 round trips, or 16 flight segments – was THE BEST rewards program in aviation history. My kids flew to college & back on tickets I earned for almost 7 years! In order to do that, I put up with peanuts & peanut fares, and enjoyed every flight, every minute of it.
The Gary Kelly got ambitious… and started to “modernize” the Rapid Rewards program… Yah, right, no more 8 Round Trips for a free ticket. Perhaps the ONLY positive thing Kelly did, was to institute the current boarding groups, and numbers.
Then, in early 21, RATHER THAN LISTEN TO THE PILOTS, SCHEDULING, AND IT, and upgrading the outdated reservation and scheduling system, Kelly took the Billions and gave it to the shareholders, in oder to prop up the stock price, which actually happened… for a short time. Then, the December weather made it impossible for the outdated infrastructure to re-schedule thousands of flights, leading the the disaster that not only knocked the stock price back, but from which it would NOT RECOVER.
Rather than firing Kelly, the Board named him Chairman… In reality, Gary Kelly killed Southwest Airlines.
And now, Elliott is nothing other than Lorenzo 2.0. What SWA was, will be no more, and the changes will spell doom for them.
SWA has been going down for years and it began when they started turning over their long served flight attendants and the pilots got feed up with the IT services. What is happening today are symptoms of mismanagement from a decade ago. People who work there are not happy anymore or they left and it shows.
I’m sorry is southwest shutting down?
No? Oh then the airline wasn’t “killed” it evolves.
I would fly SW until the Max issues. After that I just will never risk being on a Max and stopped flying SW. Now that the bags are gone I don’t see them being someone’s top pick anymore. So many better options out there. I also price check as well and always used to go with the less expensive but because of me not believing in the max anymore I specifically look for airlines fly Airbus. I am too scared of a flyer to deal with the maybes.
I figured I would live to see this. For many years, SWA was unbeatable in its DAL protected niche and no one could effectively compete with them. Their CEO Herb Kelleher was a Magic Man and everything he touched turned to gold (I met Herb at an airline gate late in my career and I have to say, he was a complete gentleman).
SWA grew out of their niche and Herb has passed on. The market has changed and the tech has changed and SWA didn’t keep up with it. Now, as I thought would happen before now, they are just another big airline, although struggling in that role.
Their computer system up to a year ago was Windows 3!
This is super interesting because the 737 only fleet has long been an operational “advantage” for SWA with regard to fleet maintenance, ability to swap crews and aircraft, etc. Also, the lack of seatback screens was once seen (at least by me) as “revolutionary” given everyone has a smartphone now, and passengers can stream content to their phones or tablets. Almost like SWA skipped the seatback screen revolution (including the Dig-E-Players on Alaska — remember those?)
But how quickly can and advantage become a disadvantage.
I started flying SW when I lived in Albany, NY. All the other options from that small market were on “partner” airlines using smaller planes with less experienced pilots often in ice and snow conditions.
It was not for price but for safety.
Even with the new 1500 hour limits for pilots on “partner” airlines and with small jets replacing prop planes I still will fly SW to small markets.
The fact that every seat was the same comfortable size and that I could book a flight far in advance and change it or cancel it and bank the refund made me a SW customer who never compared prices.
Especially after the few times my company booked me on AA or United economy seat flights.
I will miss the old South West Airlines
I’m surprised there was no mention in this article of the rather glaring lack of a first class cabin on Southwest. Even Spirit has a half-baked version of one. I would imagine that for elite business and premium leisure travelers this would have to be a relevant factor given that their other competitive points of difference are now gone.
That’s not all bad though… that failure to update actually saved them during the Crowdstrike computer disaster last summer.
An update to Windows 7 would frankly do them a world of good.
I have been a customer of Southwest for nearly 20 years and they were the only airline I would fly. In light of all these changes, I will never fly with them again. They are giving up what made them special – all seats are the same, prices were reasonable, and NO BAG FEEs. Goodbye Southwest, it was nice knowing you.
Elliott Capital Management can go f*ck itself with a rusty nail.
I fly southwest 70% of the time I could care less about entertainment and warm meals I think they were struggling purely because their technology stinks. But this article is correct that they now have no unique draw, which will kill them.
It is amazing how many rich people think they are smart and know how to run a company. It is why most corporations have a short lifespan. They are greedy and ambitious and dumb.
Seriously, SW was in decline for years; dismantle the country club management layers and get back to the basics
Elliott Investor Group sucks. People choose southwest as their fees are lower. Now they are trying to make them an ULCC model similar to Spirit, Allegiant, and Frontier. It just sucks.
Elliott Investor Group is Satan. I’m flying Southwest to Cancun in 2 weeks. This will sadly be my last time. We às consumers have choices too. It’s really about principle principle. I don’t want Elliot to make another fucking dime off me. I have flown hundreds of Southwest flights and they have been my choice 95% of the time. Remember that WE are the ones who hold all the cards. Now, Southwest has become just another choice rather than the choice. This is the day they “jumped the shark”! RIP Southwest