Activist Investor Elliott Faces an Uphill Battle in Southwest Coup Attempt

Southwest

There is no LUV for Southwest Airlines management this week as activist investor Elliott has taken more than a 10 percent stake in the airline and wants to fire Chairman Gary Kelly and CEO Bob Jordan. If you thought Carl Icahn’s investment in JetBlue was going to be a big fight, you ain’t seen nothing yet. This is going to get ugly. So far, I am not impressed by Elliott’s take, but if this does push Southwest to act more quickly, then everyone wins.

At JetBlue, Carl Icahn saw opportunity to boost a lagging stock price, but there was a new management team already trying to shake things up. Icahn wanted more oversight at the airline, but he didn’t publicly demand immediate and specific change other than getting a couple board seats. The situation with Elliott and Southwest is very different.

Elliott has put out a presentation on its Stronger Southwest website saying that the airline is stuck in the mud, and it needs management and strategy to change right away. This is war on the existing management team. Specifically, here is the plan:

The presentation focuses on Board Chair Gary Kelly and CEO Bob Jordan as being the two main targets. Elliott says this:

Current Executive Chairman and CEO are rigidly committed to the status quo. Southwest
must bring in new leadership from outside of the Company for Southwest’s strategy to evolve

If this were happening at American — and frankly, I’m surprised it’s not but then again, Southwest’s balance sheet is a lot more attractive — this might sound sensible. But this is Southwest, and it’s a first red flag that Elliott doesn’t really appreciate the uniqueness of the airline, or ANY airline for that matter.

Southwest’s years of success and stability — which Elliott does recognize — are largely thanks to a culture focused on growing leadership from within. That is good, but it does also breed a slowness in being willing to adapt and change. It’s a double-edged sword. But bringing in a true outsider to come and change the airline swiftly and mercilessly? That is a recipe for disaster at a company like this. You need something in between.

Yes, Southwest has underperformed — you can see all the details in that presentation if you want. Yes, Southwest is slow to change. Elliott should have focused on ways to fix those issues but without throwing the baby out with the bathwater. In other words, Elliott is coming in way too hot, and it seems like its plan will just create more chaos and possibly destroy value if they really push on this plan.

I don’t disagree with much of what Elliott is saying on a high level. The airline needs to be quicker to adapt and like some other airlines, it could benefit from a more proactive, more independent board. If I were Elliott, I’d have focused on the board level, trying to oust Chairman Gary Kelly and picking up at couple of board seats of my own. But trying to chop off the head of the airline’s day-to-day leadership ranks is a far riskier move that is likely to backfire.

That’s not to say that it shouldn’t try to help reform leadership. As Elliott rightly notes, there is not a lot of outside experience at Southwest. COO Andrew Watterson is the lone exception:

The airline could absolutely benefit from more diversity in background at that level. Maybe it is time for some of the longest-tenured folks to move on. But I also think that it would be beneficial for Elliott to try to work with the current CEO to make changes before resorting to regime-toppling. This could be the kick in the pants the airline needs to actually start speeding up real change.

What I find interesting is that last quarter during earnings, we heard Bob talk more about big possible changes to seating and premium products. We were promised more at investor day in September, something real and substantive. I can understand the concern about Southwest not being prone to action, but you’d think Elliott might want to wait for that day before calling for the CEO’s head. I want to hear what the plan is, and maybe this will force it to move up sooner.

The more I read the presentation, the less I think Elliott really knows what it’s looking at here. I just find a lot of the suggestions and conclusions to be poor on the revenue improvement front and only slightly better on the cost containment side. There seems to be some fundamental misunderstandings of why things are the way they are. But don’t take that as a full-throated endorsement of management either.

With Elliott trying to remove Bob and bring in outsiders, the airline should rally around its leadership. Labor is fat and happy with new contracts, so they aren’t likely to play games the way they might have a couple years ago. But leadership needs to give the employees something to rally around, a real plan for improvement.

If there’s one thing a company like Southwest is good at, it’s rallying around its people. And its people are good at rallying around it. My guess is that Elliott has overplayed its hand here. That being said, maybe it can effect change to the board structure and call that a win.

In the end, it only really cares about making money on its investment. This is not how I would have gone about trying to make that happen, but it’s apparently how Elliott likes to operate.

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63 comments on “Activist Investor Elliott Faces an Uphill Battle in Southwest Coup Attempt

  1. I think you hit on a great point about this super aggressive push from an outsider is likely to push the Southwest “family” (from leadership to rank & file employees, and to a lesser extent WN’s loyal customers) closer and make them rally around current leadership. I can’t imagine that labor is excited about an outside finance/investor group potentially cutting costs, and WN’s entire culture & identity is (still) largely based on an “us vs them” type of insular underdog mentality (despite the fact that WN is one of the largest airlines in the country by many metrics).

    I’m not a huge WN fanboy at all (I never check a bag, WN’s fares are rarely competitive on the routes I fly, and I prefer the on-board experience in basic economy on DL & even AA to the on-board experience at WN), but it definitely has its place, even if it seems to have become a little complacent in recent years and content to just milk the cash cow without improving or changing much. I’d agree that some significant changes are needed (and not just with the all-inclusive revenue model; personally, I’d like to see WN add a smaller plane to its fleet longer term, such as the A220, but that’s probably unrealistic), but I don’t think WN is bad/desperate enough at the moment to really need the mass change that Elliott is pushing for.

    1. I actually think that WN should focus on larger aircraft, not smaller aircraft. Specifically, they should have converted almost every single one of their MAX 7’s orders to either a combination of MAX 8’s/9’s or MAX 8’s/10’s – and they should have done this a long time ago. Moreso on longer routes, but even somewhat on shorter routes, the marginal cost of the additional seats on the larger variants relative to the smaller variant is small. With the larger aircraft, they could consolidate frequencies (SAN-SJC from 12 to 10, for example), feed their hub banks in DEN/BWI/BNA/STL/etc (yes, they have hub banks, just not as big as 110 departures at 1000am at DFW), and upgauge leisure markets with deep demand (MCO, LAS, PHX, etc.). MAX 8/10’s instead of MAX 7’s is basically getting a bunch of extra seats for very little incremental cost.

      The current fleet of NG 737-700’s (387 strong) is enough to fly all the DAL-LBB and HOU-CRP type of markets that they need the -700/MAX 7’s for, even after a batch of the -700 NG’s is retired in the not-too-distant future.

      These guys left a bunch of dollars on the table with their MAX 7 order.

      1. I could see that argument as well.

        The argument has long been that simplified fleet = operational efficiencies, but at this point I think it’s fair to say that the size of the aircraft that Southwest flies are a bit limiting to the airline… Certainly commericially, but as you point out, also likely from a CASM standpoint as well. To your point, obtaining larger 737 MAX models would be less drastic than moving to a non-737 model.

  2. It’s often forgotten that Southwest Airlines doesn’t have this strong, positive culture. They have a cult.

    When the company is your family, you don’t go against family traditions no matter how outdated or dumb they are.
    Have you ever tried criticising Southwest to a SWA fanboy? I would rather criticise Delta in Tim Dunns face.

    Where was the accountability when LUV destroyed half of their shareholder value?
    Where was the accountability when SWA refused (and still do to an extent) to invest in proper technology?
    Where is the accountability when costs are rising and rising and their financials are getting worse and worse with no end in sight?
    Where is all this accountability that the Board should be delivering to Gary Kelly, someone who rhas been running off Kellehers skills for how many years?

    But hey we have free checked bags. Lets slap each other on our backs and call it a day as that will solve everything right? Pan Am would agree.

    1. That maybe true, but I wonder what Elliot’s real agenda is as all activist investors have one & it’s rarely to the companies benefit.

    2. When was the last time you interacted with an active Southwest employee as a friend vs on the plane/airport?
      The cult Comment about Southwest feels like a stereotype from the 90s or 00s that I haven’t experienced with any current or active southwest employee
      I know plenty of delta and southwest employees and the blind cult following isn’t at love field…

    3. A220 – I don’t disagree with some of this, but… “Where was the accountability when SWA refused (and still do to an extent) to invest in proper technology?”

      What are they not investing in today that you find problematic? The airline has put a ton into trying to catch up after years of neglect. Just curious what you think is missing.

      1. Ramp is still pretty much a manual procedure. U checked bag and something happens, pray that your bags is going to arrive with you. Re-booking is another manual procedure, reason why when something happens, u see big lines in from of agents, all the data is in the computer, it should take seconds to find alternate routes but it doesn’t.

        1. John Smith – Rebooking shouldn’t be a tech issue. Amadeus Altea is very capable of handling this, so it must be a process issue or something else weird going on there. I’m sure there are still some things that aren’t electronic, but I would imagine that there is a plan to change all of those things. They’ve already done a ton of work. It should be faster, but at least it’s finally happening.

      2. “years of neglect” is misleading. It has actually been decades, going all the way back to the Herb Kelleher years.

        You tell me what technology SWA isn’t investing in. Their January earnings call said LUV would invest $1.7 billion in tech, yet SWA themselves didn’t even bother to specify further, so there’s clearly something there.

        Apart from a bunch of smaller things already mentioned on the thread, the one thing I have in mind (apart from CAIRO which is necessary due to the self inflicted issue of the lack of out-and-back), is any sort of special technology for their lagging operation.
        For example UA has ConnectionSaver, AA has Smart Gating, DL has been using AI to predict weather, etc.

  3. I wonder about the likelihood of Elliott recruiting Richard Anderson to step in as the next CEO if Jordan and Kelly are ousted. He’s certainly got the “outside airline” experience they’re seeking and his turnaround of Delta after bankruptcy was masterful. And he hasn’t done much since he left Amtrak.

  4. Southwest shareholders are feeling the pain from a leadship team that hasn’t articulated a vision for the airline and are suffering loses on their shares this year as the rest of the market has gone up. As Cranky pointed out, everyone has had a nice pay day this year (pilots, FAs, management) except the shareholders/owners of SWA.

    All airline CEOs cant be Herb or David Neeleman, but Southwest can do better than its current bench. The airline’s IT has shown its weakness and the company seems to have under-invested in its product with ontime performance trailing companies such as Delta.

    Similar to Carl Icahn, I think Eliot is waiting for a pop in the stock and then will cash out. Time will tell how committed they are to changing Southwest. To me, this is more a quick money play. Even Warren Buffet decided not to stay long in his Delta stock investment.

    1. They should just buy Breeze as a way to acqui-hire David Neeleman. Win-win, and they get a fleet of A220s in the deal.

  5. It sounds to me like “drain the swamp” and look how that’s turned out for the U.S. I sure hope Southwest leadership rallies around its people, because at the end of the day, positive employee morale at SWAA is one of its strongest weapons. As you point out, Cranky, it seems premature for Elliott to come out fighting ahead of investor day in September. I think Elliott has poked the bear, and that hasn’t always ended well in the airline industry.

    1. Could be a “drain the swamp” event that should have happened to the auto company OEMs before their bankruptcies/bailouts due to their unwillingness to innovative as unions and management got compensated well for status quo performance.

  6. There’s a big red flag here.

    That chart that the investor put together? It has no ideas on actual running of the airline. No ideas on changes to make it more profitable, and deliver a higher return.

    Let’s just dump all the management, change everybody out, and put in people that I want.

    As if magically, switching people out is going to change anything.

    WN could use some changes, but what is his plan. Seems like there isn’t one, except to try and leverage some cash out of the company.

    These corporate Raiders don’t do this for the good of the company, or the good of the customers. They do it because they see a way to get a bunch of money out of it in a hurry, and the company is almost never left in a better position.

    1. That’s kind of the problem. What’s the answer to what ails Southwest? Being more like the bigger global airlines probably isn’t the answer. Just keep growing doesn’t seem to be working (as Elliott points out). Find some other fees to carve out the way they didn’t have change fees — doesn’t seem realistic.

      There is one clear answer: stop doing dumb stuff like flying 60% empty Hawaii flights.

    2. JetBlue dumped Robin Hayes and installed a new CEO this year. It took her time to meet stakeholders and create a plan. You dont get the plan before the management is hired and can analyze the situation. Elliot to its credit is looking to hire a former experienced airline CEO, not a person that wants to burn the company to the ground. Clearly Southwest needs some outside vision to help it adjust to new market forces.

  7. As someone who worked at a company whom Elliott targeted, and subsequently ruined (nearly immediately culturally, and, over the long-term, completely), my feeling this is a bad omen for Southwest.

  8. I hear that Vasu is in the job market. Maybe Elliott could recruit him for their leadership changes.

    Yuk yuk yuk.

  9. Longtime Southwest flier, cardholder and casual shareholder. Very infrequent Southwest flier.

    As a young flier, I thought the model was cool: friendly people, I have a “chance” at a good seat, bags for free means room for my overhead. Full can of Dr Pepper in flight! Contrast a legacy carrier, back of the bus by the engine and maybe my carry on doesn’t get in the overhead.

    Now, anyone can get preferred seating and a shot at the overhead on a legacy carrier by participating in their non flying loyalty program.

    The only potential benefit Southwest has left for me is an occasional direct flight if I’m willing to pay more money and not keep earning points towards my primary airline, American.

    I LUV that they’re considering change.

    So yeah, I don’t pay more for less. I don’t even remember the last time their fare was within $50 of American.

    1. I think that assessing their fare structure is hard to assess because they’re leaning heavily on customers with companion passes–as a driver of both flight and credit card loyalty. For us, they are usually more expensive than the Big 3 when flying solo but cheaper when flying as a pair.

      I’d love to know what percent of WN fliers are flying as a companion-pair.

  10. The commercial strategy piece is the main part here. Other airlines have moved to monetizing EVERYTHING. Each little piece of the travel experience which has multiple product or service levels is monetized. Leg room? Bag? Seat Selection? Boarding priority? Cabins? No change/cancel fees? Monetized. (Basic Economy covers a few of these)

    Southwest meanwhile has added fees for early boarding which provides seat selection/leg room, and….. nothing. Their 4 fare products are differentiated by RR earning, refundability, flight credit transfer, boarding order (leg room) and wifi/a drink. It’s a fairly compact spread in terms of price usually. The differentiation is not significant and the pricing shows it.

    The 4 economy fare products offered by the 3 legacies/Alaska are Basic (clearly a worse product than WN’s WGA, but usually cheaper), Regular economy (equal to WGA or WGA+), refundable and legroom economy. The spread is much higher and the legroom product is a significantly better experience than Basic. Is WN Business Select really that much better of an experience than WGA?

    Reviewing all of that is where the money is that WN is missing out on. I know it goes against their credence to make a product worse for a big % of their customers but that’s the difference. That much higher value prop for the low end of the market isn’t paying the bills the way it used to for WN.

    1. To see what WNs issues are, I am compared Dallas to Baltimore, and I picked June 28 it’s more than 14 days out.

      Southwests cheapest fare is $251. You get no seat selection, two free bags, and you have to pay to change flights (their no fee changes only apply with advance purchases).

      Frontier and Spirit both fly the route. The base far is $109, and add on $50 for one checked bag (very few people check more than one back per person on a domestic flight). That’s $159.

      AA also flies it. Basic economy for $169 plus $40 for one bag.

      F9 or NK…$159
      AA…$209
      WN…$251

      All for a seat in tight spacing, one bag, no advance seat assignment.

      This is Southwest’s problem in a nutshell. Their costs are in line with the legacies, and their product is in line with the ULCCs.

      Gonna take more than some corporate raider to fix that.

      1. John G – I don’t see the same thing, but it’s irrelevant anyway. That’s just one day. The reality is that if you look at government data for FY 2023 from DAL/DFW to BWI on nonstops only, American’s average fare is $231, Southwest’s is $158, Spirit is $84, and Frontier is $79. None of that includes ancillaries.

        For Frontier, the new bundles are going to add only about $40 to get something similar to Southwest. Before this new structure, it would have been over $100 extra easily. Of course, if you’re flying on a Friday as you suggested, you have to be fine with that pre-7am departure.

        For Spirit, you’re looking at $55 to bring either a carry on OR a checked bag. If you want more, then you’re going to have to keep adding. And on Spirit you have to be ok with flying later in the afternoon.

        On all of these, you have to prefer DFW unless you fly Southwest.

        The point is that a single date does not tell the real story. And you say Southwest has legacy costs, but it most certainly does not. It’s not what it used to be, but it is still well below.

  11. “That much higher value prop for the low end of the market isn’t paying the bills the way it used to for WN.” -abcdefg.

    Or F9, or NK. After decades of doddling and trying stupid ideas like a low-cost airline within an airline the big three have finally figured out how to compete against the bottom end of the market. Vasu was Not wrong when he proclaimed that AA’s product was its network. The Big Three have a dozen revenue stream possibilities vs. WN & the LCC club that have 4 or 5.

  12. CF nails it in that WN needs to copy DL’s very successful “Keep Delta My Delta” campaign.
    As much as some people – largely those that don’t understand DL or WN – denigrate the culture, both companies have done a very good job of taking care of their customers, their employees and their stockholders on an above average basis and for longer periods of time than other airlines.

    The root of WN’s problems can be laid at Boeing’s feet and their inability to certify the MAX 7 and deliver even MAX 8s which WN has said are too large for many of WN’s route network as a heavily point to point carrier. AA, DL and UA all had A321NEOs and other models on order but low cost carriers are built around simpler fleet and high rates of growth; WN has been hamstrung in being able to grow for more than 5 years. If WN knew 5 years ago that Boeing would still not have the MAX 7 certified 5 years after it was promised and counting, they would have taken other steps. WN has repeatedly revised down its expected vs. contractual deliveries. Their strategies are now in response to the reality that they won’t get significant numbers of new aircraft for several more years. If Elliott really wants to make an impact, take on Boeing and they will benefit far more airlines and airline stocks than just Southwest. Yes, WN underinvested in technology but they have been pushing their fleet and their schedule far harder than they would if they had more planes available.

    And let’s not forget that Icahn created a lot of fear when he announced his equity in JBLU and yet he has done very little in part because JBLU had a turnaround plan. LUV already was working on a plan and I would bet that Elliott will pocket some cash from the rise of LUV stock which they helped make happen but which is not likely to significantly change the strategy that WN already intended to do.

    1. Tim,

      Great point! Well done! Maybe Elliott should acquire 11% of Boeing!

      Gotta give credit where credit is due.

    2. The fleet decisions point towards some of the inaction/patting-themselves-on-the-back behavior that some of the commenters above called out though. The time to diversify the fleet was when the MAX was grounded for two years following the two crashes. Of course it is Boeing’s fault, but the inability of Southwest to adapt to that reality a couple of years ago is a failure on the airline’s part as well. Are you telling me an airline with a fleet of 900 aircraft cannot dual-source planes from two or more manufacturers and get similar economies of scale?

      1. I don’t disagree that WN should figure out how to use two types of aircraft; they will have to be in a transition phase because the 737 is in its last iteration.

        But other airlines including UA, Ryanair and others are hurting from a lack of Boeing deliveries and UA esp. has multiple types of aircraft in its fleet and on order.

        If Boeing had said (or known) 5 years ago how badly things were going to go, everyone would have bailed but WN did patiently wait through one more notification from Boeing after another of further delays. WN has been as faithful of a defender of Boeing as any airline – perhaps to a fault – but no one else can deliver what Boeing can’t and we have seen that w/ UA picking up just 3 dozen additional A321NEOs over 2 years above their current order book – and UA was willing to pay good money to add capacity.

        Boeing needs to be fixed and a whole lot of airlines will find life much better, including Southwest.

        1. I encourage any WN pax to fly on a DL Airbus 220 and then see if you want to go back. WN should be looking long and hard at the 220

        2. I get that it’s fun to kick Boeing while they are down, but I don’t think the fleet is the biggest issue here. I think it has more to do with the fact that they don’t really know what they want to be anymore. In the 1990s, they were the no frills short hop airline that saved people money. You were fine making 2 or 3 stops on longer trips because the turns were quick and you had leftover cash. Now they act like a national carrier and have fares like a national carrier, but they haven’t improved the operation to make flying across the country as easy as the legacies. I was helping my sister look for plane tickets from RDU to BOI. United and Southwest had similar fares, but Southwest required a 3.5 hour layover in Denver or a flight that went from DAL to LAS to BOI. What about their product makes that hassle worth it? They need to figure out a way to make longer flights less of a headache or go back to being a regional carrier.

          And people can talk about how much they love open seating, but I’m not a college student anymore. I don’t want to have to set an alarm to check in right at 24 hours. Even creating a “business section” with assigned seats and maybe more legroom at the front would be something a number of people would pay for.

    3. Southwest is currently is around 200 planes short of what they had planned back in 2017 when the first MAX8s were delivered. The schedule shows it, cities discontinued, no new cities in years and thinner and thinner schedules. For example, adding flights at newly opened gates at Ohare looked promising, but with the recent schedule reductions, it’s hard to find convenient flights at ORD.

      The 737 is an ancient design, it flew alongside 880s and 990s, L188 Electras, Connies and other long forgotten airplanes back in 1967. Southwest will have to transition to a new plane sometime, like yesterday. Embraer offers a smaller plane, and the nearest delivery slots, The E2 195 would work well on short haul low density routes. The A220 is the closest alternative to the 737, especially once the A220-500 is launched. The A321 offers growth potential, but the waiting list is approaching a decade. Waiting for Boeing to get their act together hasn’t worked for the last 5 years, and nothing new is even on the distant horizon.

      1. Based on what I read in the Elliott Presentation, slide 36, Southwest has more aircraft than it knows what to do with. For some inexplicable reason Southwest is clinging to low load factor routes that their competitors don’t. A full 12% of Southwest’s routes have a load factor below 70%, vs. 3% at American and 1% at United and Delta. Even horribly run American has only 3% of routes with load factors under 70%. I can see Southwest having maybe 5% of routes with sub 70% load factors due their route structure and only having 2 aircraft sizes, but 12%?? C’mon man, that is horrible management. It would appear Southwest has plenty of aircraft available if they would just stop flying over 10% of their fleet around half empty.

  13. Scott Galloway has a famous quote about activists picking proxy fights, “You’re not as smart as you think, and they’re not as dumb as you hoped.”

    1. Yes, activist investors need to pick their targets carefully. Nelson Peltz launched a proxy battle at Disney recently; he did not win a board seat but did make a billion dollar profit. If that is losing, I would be happy to lose with a profit like that.

  14. On page 36 of the Elliott presentation one finds the following, “If you look even at the big airlines that have lower margins than the top two, there’s a core airline within them that has the same kind of margins as United and Delta, but it’s dragged down by the stuff that loses money.
    – United CEO Scott Kirby, June 2024”

    I think we know where that quote came from – “The Air Show Podcast Interviews United CEO Scott Kirby”. Congratulations!
    ——–

    In the piece, CF observed, “If this were happening at American — and frankly, I’m surprised it’s not but then again,”

    Also color me a bit surprised that an “activist investor” hasn’t bought into American – yet. But one never knows. From looking at Elliott’s presentation, it almost appears as if they believe that American is almost as well run as Delta and United. Obviously, they haven’t been reading airline blogs.

    If one is looking for an “activist investor” Maybe David Neeleman will do. He could take over JetBlue, and then turn around and acquire American. If “America West” can do it, just sayin’ … LOL

    Never a dull moment in the world of airlines. Stay tuned.

    1. > Also color me a bit surprised that an “activist investor” hasn’t bought into American – yet.

      Union contracts are mostly locked-in cost. Even if an activist investor gained 100% control of American, any transformation plan would have to work within the existing web of collective bargaining agreements, partnerships with other companies, etc. It wouldn’t surprise me if Elliott and others have looked at it and determined that there aren’t enough levers that can be moved to deliver the short-term results they’d need to justify their investment and effort.

      Southwest is still a very big, complicated company, but it’s meaningfully simpler and less constrained in its action than AA.

  15. I looked through the presentation and while I can’t say if their proposed solution is the right one, they certainly are pointing out a lot of the problems that WN has created for itself. The Hawaii inter-island flying was mind boggling, with a 47% load factor and $38 average fare. They also point to a large increase in low load factor flights which, while not necessarily money losing, is concerning

    1. Angetenar – The low load factor thing is actually a little misleading. I’m working on a post about this, but in short, because Boeing hasn’t been able to deliver 737-7 MAXs, Southwest has taken more -8s and that means more empty seats is not a surprise.

      1. The additional trip cost for a MAX8 versus a MAX7 is around 5%, so that isn’t the issue.
        Flying 20+ year old 700s that burn 15% more fuel and require alot more maintenance is.

        If Hawaii isn’t working, then cut back, especially the inter island flights. Hawaii is brutally expensive, and the model of an airline without premium seating may not work to Hawaii. Also, not offering redeyes is tough, and takes up too many planes that could be more effectively utilized if they flew back to the mainland overnight.

        1. Phoenix T4 – I wasn’t talking about costs or about Hawai?i specifically. I was talking about the last point that focuses on all those routes that now have lower load factors than back in 2018. It doesn’t matter if the costs are different, but with more seats, lower load factors are to be expected.

  16. The problem for WN is that more and more flyers are finally waking up to the reality that on virtually every other US carrier, you get what you pay for. Want a bigger seat/more legroom? Pay the man. Want to board earlier and get a certain seat? Pony up. WN is really the only US carrier where, if you buy a last-minute ticket, you’ll all but guarantee yourself a place in the dreaded “C” cattle line and likely a middle seat with no shot at a seat with more room, let alone the opportunity to potentially upgrade to a nicer cabin. For many years, WN was running off the fumes of fuel hedges and great PR. Those days are over. Face the reality that it’s either adapt or die.

    1. Good point and not only that, on other carriers, your money goes further than SW. I can’t use award ticket to go to Asia or Europe on SW. But on UA, absolutely. So my money spent goes towards something on UA unlike SW which is rather limited. SW needs to expand and codeshare with some alliance.

    2. Not only that, but for the pleasure of boarding pass C20 and a middle seat by the bathroom, you will pay $400 or more.

      There is zero value there.

  17. I like the use of the Keep Delta My Delta button.

    I had no idea that Southwest was vastly under performing. I guess they lost one of their big advantages when the legacy airlines got rid of change fees. I always thought they were good for intra-state flying, but I would never want to fly them anything over 1000 miles. Not knowing where you are going to sit on a cramped 737 sounds miserable.

  18. Brett, any post planned about WN now listing fares on Google Flights? This seems like a big change.

  19. It baffles me that they haven’t figured out how to sell food. Sure the default passenger on all airlines now is eating before flights or bringing food on board, but I can’t imagine flying to Hawaii without having the option to buy something. They are late to the game on at-seat power too

  20. Elliott is right that Gary Kelly must go… he has and continues to damage SWA. He has put SWA in this position. He is an initial corporate raider and he has stack the board with like minded directors.

  21. Great article as usual! I’m going to have to disagree with you on your conclusion though. While Elliott is lacking specificity, they are not wrong that the trouble starts at the top with an entrenched management team. The last two CEOs inherited a high margin, debt free business and have frittered away their margins and any advantage that is to be gained from them.

    Technology is a huge handicap for WN. The speed at which WNs technology innovations (like rewiring their res system for international travel) are implemented would get many executives fired. Decision making is glacial. I’m sure they had internet traffic data that told them that Google Flights was gaining share. I had a sense of it as a consumer buying leisure tickets from my desktop. They decided last month to “run an experiment” on selling on Google Flights.

    Look at the executive team. There is a lack of analytical talent and an overweight on operational chops. Lets not count the Finance guys as analytical talent given that they are focused on the cost side of the ledger. American has the identical issue as far as talent goes. Compare that to the quality of the analytically driven people in the senior mgmt team at United or Delta. Sometimes the answers are not that complicated!!

    I personally think they started falling back under the prior CEO who rode the coat-tails of a great oil hedge trade for a few years.

    So Elliott is spot on. WN has grown up and it is time to bring in an outsider. The outsider will instill a sense of urgency in the commercial organization.

    1. You have to honestly ask what the motivation is to ask for a purge of the executive team just because there are no outsiders. Being “inside” or “outside” of a company does not address the key reasons why most people suggest LUV is struggling now and how an outsider would do anything to turn the company around that LUV is not already saying they are looking at. As CF notes, WN acknowledges it underinvested in infrastructure – not just IT but also ground equipment – and have or are correcting that.

      Elliott made a big deal about WN’s Hawaii performance and CF would have to use his data to verify if their numbers are correct. Airlines are notoriously poor long-term investments because they are subject to a host of external macroeconomic factors and airlines also engage in varying amounts of developmental/loss-making flying. All companies that intend to grow have to develop new markets and it takes time for those markets to develop and develop profit margins comparable to existing lines of business (in a well-run company). There is also a certain amount of loss-making flying that airlines do because of strategic reasons – Parker and Kirby repeatedly said that a lot of AA’s transpacific flying was strategic but it lost money for years and AA ended up pulling much of it anyway. CF just detailed the significant underperformance of UA’s transpacific system during the winter and UA execs themselves said their transatlantic system underperformed last year which is hard to understand given that UA is the largest carrier in both regions. Many people have accused DL of operating some of its hubs at a loss and yet DL has taken a measured long-term buildup of its coastal hubs even while managing to deliver industry-leading bottom line profits for a long string of years. If WN’s Hawaii flying is really a problem – and I suspect the impact to WN’s bottom line is being overblown – then WN probably has documents that it can show the long-term nature of its investment in Hawaii.

      Btw, LUV stock yesterday gave up most of the gains it had on Monday when Elliott announced its plans – which probably means that holders of the other 88% of stock that Elliott doesn’t control see little likelihood of changes at LUV that investors are not already counting on – or not. Of the 19 Wall Street analysts that track LUV, half rate it as HOLD with the rest split between BUY/STRONG BUY and the other half of the remainder as SELL/STRONG SELL. Wall Street ratings have been fairly consistent for 9 months with the addition of SELL/STRONG SELL being added last spring after financial results of the Christmas 2022 operational meltdown became apparent.

      And Bob Jordan just came out and said he has no plans to resign.

      I tend to think that Elliott will accomplish little more than perhaps pushing forward some of the initiatives LUV has been thinking about anyway -not unlike what is happening at JBLU.

      1. Executives should be measured on their ability to get things done quickly, taking risk with new ideas and having the courage to pull the plug if it is not working and balancing all this with the culture of the firm. WN leaders score very poorly on the first two categories and an A+ for largely maintaining the culture. Shareholders should expect more and Elliott is giving voice to that. They did not find a lot of disagreement with their views when they polled shareholders.

        Imagine Scott Kirby taking the reins of Southwest instead of Bob Jordan. Would the culture be retained? Yes. Would WN be more competitive on margins? Absolutely. I have no idea what network or ancillary changes Kirby would make but I do know for a fact that he would not tolerate margin erosion. Why can’t shareholders aspire to something different instead of being entrenched in status quo and the fear of shaking things up too much. Maybe, Mr. Jordan will survive because of the labor unions and by sowing doubt about the uncertainty of new leadership. That is not to be conflated with the fact that WN has let its competitiveness systematically erode over the last decade. Change is needed. Airline investors, boards and insiders drink too much of their own KoolAid and think it is impossible to bring in an outsider. Maybe a tech executive is the wrong fit but a transportation strategy consultant or another transport/leisure executive could work. What’s the downside of trying?

        Elliott is notoriously stubborn and the shareholder base is restive. I would not bet against them succeeding here. Maybe there is no answer to the margin problem but they need to try as many ideas as they can as quickly as they can. The words “Thats how we have always done it” should be retired at WN.

        1. First, please provide evidence that LUV’s shareholders are “restive” since LUV is 81% held by many of the same institutions that hold DAL (76% institutional) and other airlines.

          Second, your conclusions about WN mgmt. performance are secondary to the reasons for the downfall in the company’s performance. I still believe there is abundant evidence that it is related to Boeing’s delivery delays, lack of certification of the MAX 7, and WN having to use the MAX 8 which WN has repeatedly said the 737-800/MAX 8 is too large for many portions of its network. They are also having to fly a shrinking number of -700s much harder and that is costly. If WN execs can be criticized, it is that they waited too long to realize Boeing cannot deliver what they committed to and so WN needs to come up w/ another plan – which is what they are doing now.

          A large part of the recommendations that people say WN needs to do are about the core WN product – and the biggest issue is about seating. You have to ask why it doesn’t work now and the #1 reason is because the public has changed and the egalitarian, community-respecting principles that worked for decades w/ WN’s open seating don’t work any more as people fake disabilities and grab large parts of the best parts of the plane – all while social media amplifies those types of events.

          Other airline CEOs or execs from outside WN might be able to turn WN around faster – but citing UA as an example misses the point that UA underperformed DL profits by $2 billion in 2023 despite flying more ASMs. If you are going to pick on any airline, then do it fairly across all airlines including AA. And maybe DL is also leaving profits on the table but it is hard to find a basis for a better comparison either historically for DL or other airlines today.

          WN has always run a fundamentally different kind of airline and there is no assurance that adopting all of the things that make a global legacy carrier more profitable could be implemented at WN in a decade of trying even if someone decided to follow DL or UA’s example. and let’s also not forget that UA was mismanaged and underperformed for years so many of the “fixes” have come relatively easily.

          We’re not going to agree on the causes or fixes for WN but WN execs might prove that they are big enough to redirect the trajectory of their business on their own.

          And let’s also not forget that UA has the greatest hub overlap w/ WN and UA has undoubtedly benefitted from WN’s problems and changes to UA policies such as change fees which have eroded WN’s position relative to WN. Unless the industry grows much faster than it is doing right now, WN’s improvement will come at the expense of someone else.

        2. Frostrow – I think Scott Kirby going in would absolutely not maintain the culture. It’s a different animal at Southwest, and they should tread very carefully. Just bringing in a big name from the outside would likely have major consequences. This is why I still think the right way to go is to go after the board. Once Gary Kelly is gone, then you can work with the CEO.
          If the CEO can’t get in shape quickly, then you find someone to do it but it should be someone internal. So start bringing in and building up good bench strength asap. That’s where people should come in from the outside and then see if they fit.

  22. Herb and Rollin Set up WN so no one could ever come in and have the majority to leverage a hostile takeover against the company. Elliot major investment into the company with its stock purchase will never give them the majority Vote to leverage anything drastic. That’s why they want WN to shake up the BOD so they can pick them off one by one to hopefully try and steal the majority but again they will never get 51% if the Majority Vote unless the Buy everyone off which is very unlikely to ever happen. While Their investment did make them
    major shareholder and allows them to have a bigger voice about their return on the investment it’s just about all they can do.
    When Warren Buffet floated the idea of investing in Southwest he wanted the 51% controlling stake in the company under the Berkshire Hathaway group. But Southwest to protect the company’s and employees best interests said NO and BH walked away.
    Elliot can scream for change all they want But they have Zero Power to force Bob out .
    Changes at WN are coming and hopefully it will either bring seat assignments or some Hybrid open seating with Zone sections on the Aircraft to bring back the value lost to their 3 highest product offerings. It’s no secret the “Jetway Jesus” Fake Pre Boarding scammer are gaming WN boarding system by Buying the cheapest ticket and asking to Pre Board. They need to address that problem once and for all.
    WN has floated the idea of changing the boarding system many times over the recent years but they eventual with all their focus groups self testing different boarding systems always eventual decide on just talk themselves out of it to just going back to 1971 KISS mindset.
    Hopefully the Elliot Group fire under the BOD will actually push for an actual change to bring a better overall value to their product and not another “Don’t be a Bin Hog Campaign “ which sounded good on paper but failed miserably in execution.

  23. HOW TO FIX Southwest.
    The Two Zone open seating boarding system.
    First Keep open seating and Bags Fly Free.
    BUT modify the boarding system And have Two separate Zones on every aircraft.
    One possible option is Eliminate 6 seats forward of the Exit Row on all aircraft this would allow WN to offer these seats as “Luv seating” (extra leg room seats) This would bring the 737-700 back to 137 passengers and 169 on the 737-800 & MAX8 to 169 passengers.
    All the rows behind the Exit row would remain the standard WN seat pitch they offer today that has the most leg room in the entire aviation industry when it comes to standard economy seating.
    Eliminate All the THRU flights from its network.
    WN could sell “LUV seating”as its new Anytime fares and Rapid rewards Chase CC automatic upgraded perks when you buy your ticket to the the CC.
    Once boarding starts .
    Still offer Business Select boarding A1-A15
    Then A16-A60
    These passengers would have the first opportunity to score these seats during the boarding process.
    Then Anyone that buys Wanna get away plus Fares would get boarding group B1-B60
    They would have the next opportunity to possibly get the remaining prime seats.
    With TWO separate Zones WN can legally tell passengers who didn’t BUY the hire fares and ask for preboarding to sit in their required zone.
    This would eliminate the current problem of everyone Gaming WN system by buying the cheapest WGA fare then asking for preboarding and taking all the front seats ,over head bin space and trying to save rows for everyone else in their party in group C away from the Business Select passengers and A and B Boarding groups
    Without doing seat assignments keeping open seating with just the Two Zones
    WN per ADA requirement could still offer Passengers who are physically restricted or have their own Wheelchairs or services animals buik head seats when needed on a case by case basis.
    Between groups B and C offer Family boarding for families with children between the ages 1-14 that haven’t upgraded to boarding group A or B.
    Then Board Group C1-60.
    typically the lowest WAG fare passengers are forced to check bags in the Jetway when they run out of overhead bin space.
    By simply switching the carry on luggage rules for the Lowest fare group to Just 2 FREE checked bags and ONE small personal item this would eliminate 90% or WN boarding issues and speed up the entire process.
    PBScammers rolling onto the aircraft with TOO MANY items taking up all the over head bin space.
    The higher fares can do the flight Same Day stand by on any flight.

    1. WN can offer it to the WAG fare passengers as a perk as long as they bought the cheapest ticket with the Chase Rapid rewards CC.
      Now we all know Delays happen for various reasons. So when anyone in the 3 top tier ticket buckets miss their boarding groups because WN failed to make the scheduled connection.WN could automatically offer a mobile refund in the Fare difference between the purchased and the lowest base WAG fare for the inconvenience.
      Via the mobile app for those passengers that are missing the scheduled connecting time because of the delayed inbound flight Free Adult Beverage on the flight, Free Wifi ,Free boarding group upgrade they can use on their next WN flight or offer a 20% discount code on they can use on their new ticket purchase.

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