Elliott’s Preliminary Thoughts on Fixing Southwest Could Devastate the Airline

Southwest

On The Air Show this week, Brian, Jon, and I dug deeper with a focus on how Southwest got to this point where Elliott swooped in. Come have a listen on Spotify/Apple Podcasts/Amazon/Pocket Casts when it goes live later today (June 20).


Activist investor Elliott has decided that Southwest Airlines is being run poorly, and it thinks changes can be made that will spike the share price from $28ish today to $49 in short order. We can all agree that Southwest does have serious problems, but I’ve already explained why I don’t think Elliott is all that interested in a sustainable fix. It just cares about getting the stock price where it needs it to be in the short-term regardless of long-term impact. (This company profile from 2018 really explains how this aggressively terrifying company operates.)

The overarching problem here is that Elliott seems to have a cursory understanding of the industry and an even more basic understanding of Southwest itself. It knows this, and that’s why it wants to bring in a new CEO from the outside to conduct a business review and implement changes. That alone isn’t a problem, but Elliott has already set goals for the airline based on its internal models which it says create “the most compelling airline turnaround opportunity in the last 20 years.” This means a new CEO is already hamstrung on having to reach these financial targets in short order, and that’s going to encourage short-term decision-making with long-term consequences.

Since Elliott isn’t an expert here, I’ve been looking for anything to suggest that its models are built on something solid. In some ways, we can only read the tea leaves, but there were a couple of slides in the company’s presentation that suggest Elliott’s model is incompatible with Southwest’s long-term success.

Elliott says it had “more than 130 conversations” with former employees, and it spoke with “leading industry advisors,” shareholders, and over 2,000 customers. It clearly has an idea of how much more money it thinks Southwest can generate. In fact, it says on slide 47 how it’s being conservative by using numbers that are in line with or slightly below those coming out of American, Delta, and United. That is still a questionable way to look at this.

Let’s start with slide 31 which I think probably sums up Elliott’s assumptions most succinctly.

This slide says that “industry-standard commercial initiatives” have been ruled out by Southwest. The implication is that Southwest should be doing these things and then… PROFIT! This, of course, assumes that Southwest is the same kind of airline as those legacy carriers, which it is not. For example, these are all airlines with large international networks that are responsible for producing the big returns right now. Southwest does not and will not have that anytime soon.

If “copy other airlines” is truly how Elliott is modeling this, then it’s a real mistake. It suggests no understanding of why Southwest is different and no nuance in terms of how Southwest should consider its options. Southwest has made a living with tangible differentiators since it first started flying. This money-grab would put an end to that, and there would be consequences in competitive markets.

Let’s talk about seating, because I think this shows why just copying the legacies isn’t the right thing to do. There is good work to be done here if Southwest can get out of its own way — it has already said it’s looking at seating and will tell us more in September at investor day — but it’ requires nuance’s not like it’s a simple flip of a switch.

This is one area where I think Southwest should partially follow the legacies, but it would certainly dilute the number of people buying Early Bird. So there is a tradeoff here. Also, Southwest shouldn’t do the whole “preferred seating” game where it charges for seats toward the front even though they are no different than the seats in the back. This could hurt revenue potential, but it doesn’t fit with the Southwest style. Save that for premium….

The quote on premium products says that Southwest doesn’t think curtains are the right thing for the airline. I agree. But an extra legroom section? That doesn’t need a curtain, and it would be a big improvement for the airline. People will absolutely pay for that. How much? I don’t know, but in 2023 Southwest had just shy of 1.5 million flights. If you sold 20 seats a flight at $35 a pop, that’s $1 billion a year.

If this were to happen, it has to go hand-in-hand with assigned seating. I can imagine a lot of angry people who paid for legroom and get stuck in the middle only to find they could have had an aisle or window in the back. It’s no small undertaking.

This doesn’t even address Basic Economy and checked bag fees, both of which I think would be a bad plan at this point even though they undoubtedly contribute significant revenue in Elliott’s model.

Nothing screams the opposite of Southwest Airlines more than Basic Economy. In fact, that would do tremendous damage to the customer-centric brand. And lastly, we have the checked bag fee. I’ve long thought that a second checked bag fee would make sense, but I also don’t know how much money that would even bring in. It might not be worth it. But in a world where Southwest’s biggest competitive advantage — lack of change fees — has disappeared, the airline needs one that it can hang its hat on. Free checked bags are the best differentiator right now.

The other piece of the analysis in the presentation is around network changes. From slide 36, we have two charts:

The one on the left shows Southwest’s load factor issues, but again, nuance rules the day. Yes, Southwest’s load factor has dropped overall. It really fell off after a great 2022. Remember the December 2022 meltdown? Yeah, right after that. There’s clearly still some kind of hangover there.

But I pulled my own numbers using T-100 data in Cirium to recreate the chart, and it was a little less than 12 percent, but directionally this is accurate. Southwest had a lot more routes — 151 by my numbers — that didn’t hit 70 percent loads in 2023. But here’s the thing, it’s not like Southwest has been sitting still.

  • 27 of those markets were exited
  • 89 of those markets saw reduced flights and/or seats in 2024 compared to 2023
  • 14 of those markets were less than a year old, so they are developing

All those changes led to a nearly 10 point decrease in Q1 2024 capacity on routes with lower than a 70 percent load factor vs Q1 2023.

On top of those network changes, it’s important to remember that Southwest has not been able to take delivery of any 150-seat Boeing 737-7 MAXs since that airplane has not yet been certified. Instead, it has been taking 175-seat 737-8 MAXs to complement the 175-seat 737-800s. The mix is very different than it used to be with the number of small aircraft dropping from two-thirds of the fleet in 2018 to less than half now.

Southwest Fleet Composition by Year

Data via Southwest Airlines 10-K

With so many more big airplanes, it’s not really a surprise that load factors would be lower. There are parts of the network that don’t need an airplane that big.

It’s this MAX problem, by the way, that has caused such heartburn for Southwest on the cost side as well. It has hired to staff a lot more airplanes than it actually has thanks to Boeing’s delays in manufacturing and delivery. It might sound easy to just lay people off and call it a day, but that would really ignore what makes Southwest… Southwest. Besides, costs aren’t the real issue here, as we discussed on The Air Show this week. This is mainly a revenue issue.

And speaking of revenue issues, the right side of that chart above is the mess that is Hawaiʻi service with low load factors and fares on interisland routes. On the surface, yes, this looks terrible. But it’s really a rounding error for the airline. There are other reasons for keeping that service operating, but it doesn’t really matter. It’s just a tiny corner of the network with some strategic value.

Look, I hate completely defending Southwest here, because I think the airline has hemmed and hawed its way into this position. There is no good excuse for the glacial pace of change at that airline, frankly. But the point is that from the outside it looks a lot simpler than it is to fix this airline the right way.

Again, Elliott wants to bring in an outside CEO to “fix” this, but if Elliott has set these revenue targets based on a simplistic view of how the airline could fix its revenue problem, then that CEO will already be hamstrung by those lofty expectations. Elliott may claim it will rely on a new CEO to propose the fix, but it is already putting that person in a box.


Learn more about this on this week’s The Air Show podcast.

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59 comments on “Elliott’s Preliminary Thoughts on Fixing Southwest Could Devastate the Airline

  1. Is the podcast going live today, June 20th? You have June 18 written in the forward blurb but it doesn’t appear to be live anywhere yet.

    1. Shoot, yes, sorry. It will be live later today, the 20th. If you subscribe through your favorite podcast app then you will be notified once it’s live.

  2. “Activist investor Elliott has decided that Southwest Airlines is being run poorly, and it thinks changes can be made that will spike the share price from $28ish today to $49 in short order. We can all agree that Southwest does have serious problems, but I’ve already explained why I don’t think Elliott is all that interested in a sustainable fix. It just cares about getting the stock price where it needs it to be in the short-term regardless of long-term impact. (This company profile from 2018 really explains how this aggressively terrifying company operates.”

    This opening paragraph in a nutshell shows just what is wrong with current business trends by certain investors/ groups, no consideration for the long-term health of the company. Sears, Circuit City & Bed bath & beyond are but three examples of this dangerous mindset & it’s getting worse over time.

  3. What Cranky didnt mention was the ability for WN to develop more revenue from its relationship with Chase. Offering a higher end card with more benefits as a way to grow revenue. JetBlue has Mint, Spriit had the big front seats, and on Frontier you can buy a upgrade to block the middle seat or extra legroom. There is a premium product that WN can develop that fits its culture and tech, especially if the load factor is lower and space is available. The problem is Southwest hasnt innovated at all.

    1. They do have that…. I signed up for the Chase card because they gave me free Companion Pass status. Dunno if that promo is running right now, but I have seen it off an on over the last year. That certainly qualifies!

  4. SW is an entirely Basic Economy airline. You have to buy your way up out of successive circles of hell. The problem is, there’s no real heaven here (i.e., some semblance of an F cabin) to shoot for. Cranky seems inclined to agree, to a degree (“This is one area where I think Southwest should partially follow the legacies…”).

    1. Basic Economy means some very specific things; the only way in which Southwest emulates that product is the lack of a seating assignment. The other parts of Basic Economy (change fees (or inability to change), charging for carry-ons, charging more for checked bags) aren’t part of the Southwest product at all.

      1. On other airlines, basic economy means you have no control over where you sit, and will likely end up in a middle seat towards the back. This is completely different from Southwest, where you can pick any available seat, and can usually get your preferred type if you check in at a reasonable hour.

    2. Basic Econ implies an Allegiant or Frontier type experience. Southwest has none of those add on charges.

  5. It smells very much like Elliott wants to do to Southwest what Eddie Lampert did to Sears. And that’s trying to remake the business in his own Ruthless Cost-Cutter image, and simply ignore the signs when the strategy is a complete and total failure. (And then congratulate himself on his cleverness, as he takes Southwest’s now-disused planes (disused because he made things go to shit) and profitably lease them to other airlines.)

    (Lampert essentially cut off capital spending by Sears/KMart, and the stores (already on the older side) quickly started to degrade. Reductions in customer service, and selling off rights to Sears’s iconic brands sealed the deal, all while Lampert firmly believed that “Our Shopping Rewards Program Will Save the Day!” (going so far as to consistently insist on calling all shopper “members”, and talking about it in every press release.) In the end, he just let it become a real estate business that happened to own some stores.

  6. I agree with the overall premise of Sean’s remarks. I think it’s important to remember that Circuit City Sears and Bed Bath & Beyond had structural problems long before the vultures attacked. In fact one can argue that it was their unwillingness to acknowledge and adapt to a changing Marketplace that led to their death spiral.

    There is a fine line between creative destruction capitalism and vulture capitalism. I liken it the earlier to when the forestry service was sets controlled fires this time of year to burn off the underbrush and prevent larger out of control forest fires in the height of Fire season at the end of summer and early fall. If it’s done surgically it’s good for the overall survival of the company and the industry as a whole.

    Now is Elliot planning on doing the surgically or looting the valuables and burning the house to the ground.

    .

    1. Thanks Eric,

      I’ve followed retail for over twenty years both as a mall rat & for my old job at a business improvement district. As a result I would notice trends within the mall industry. Some proved to be ridiculous such as relying far to much on one type of store category like fashion. Other trends such as adding various sit down restaurants & family entertainment centers have proven to be extremely positive.

      Elliot as you noted has shades of “fast Eddie” as we mall rats call him & that may prove dangerous for Southwest. This bears watching for trends for not just SW, but the industry as a whole. Once one of these investor types get a bright idea on how to make a quick buck, that could mean game over.

      As much as he could be a prick at times, casino legend Steve Wynn recognized this for what it was & called bullshit on it. This was noted in the 2010 book “Winner takes All” by Christina Binkley. Highly recommend it.

  7. Given that changing up plane seating will take a bit, anything Elliot can do quickly for revenue is going to hurt WN’s competitiveness in places where they have competition. I’m sure DL would love nothing more than for WN to become undifferentiated in AUS, for example.

    And if you’re going to play with seating, you’ll need to pull seats out of 700s to do it unless you’re going to drop seat pitch to a cramped 30″…which, okay, Elliot might do that. The 800s/MAXes could just have seating shifted around so that every seat on the plane no longer has decent legroom, but if they’re complaining about LFs I guess you could take seats out of those as well (with the caveat that that might be a revenue negative decision).

    As for Basic Economy, people will catch on quickly there, and will start comparing whatever the non-basic WN fare is with Main elsewhere, and Basic on WN with Basic elsewhere. Now that their flights are on Google including pricing, this is easy to do. So this feels really easy to screw up.

    And I’m worried, as WN has 42% passenger share at AUS at this point, and while I have low tier DL elite status this year and next year there are more places I can fly nonstop on WN so I’d rather not have to avoid them.

  8. I think the biggest question in assessing these changes is: What % of Southwest passengers are choosing the airline based on the brand and unique offerings, and what % are just flying Southwest because they have the best schedule for when and where they’d like to fly?

    Southwest does a ton of “point-to-point” flying on routes that don’t have a mainline hub on either end. They’re probably winning most of those passengers based on schedule, not based on brand positioning.

    At the same time, they’re competing head-to-head with legacy hubs in many metro areas (Dallas, Houston, Chicago, Denver, etc.) I could imagine passengers preferentially booking Southwest rather than e.g. booking a Basic Economy fare on United.

    I don’t have a good understanding of how much of their revenue comes from the first bucket vs. the second.

    On assigned seating specifically – it seems like a practice that has probably outlived its usefulness. I haven’t talked to anyone in recent years that *likes* the practice. It adds stress for passengers and often forces late-boarding groups to split up. I’m not convinced it reduces turn times either – the race for overhead bin space generally makes sure passengers on other airlines board as soon as their group is called now. Moving to a more industry-standard approach seems like a win here.

    > Also, Southwest shouldn’t do the whole “preferred seating” game where it charges for seats toward the front even though they are no different than the seats in the back. This could hurt revenue potential, but it doesn’t fit with the Southwest style.

    If you move to a system where every passenger has an assigned seat, then a “Southwest-style” approach to allocate them might be:

    1. You can pay to select a seat (any seat) prior to check-in. Could charge variable prices depending on seat (like most airlines), or a flat price for any seat (might be more Southwest style). This is instead of the current Early Bird offering, though it could also include boarding in an early group.
    2. If you don’t pay to select a seat, then you put in (non-binding) preference for aisle vs. window seat.
    3. During check-in, a computer algorithm assigns seats. It prioritizes keeping your group together, and fulfilling your preferences if there are appropriate seats remaining on the plane. Essentially, the computer selects seats the same way you’d expect a passenger to select them if they boarded in check-in order.

    This would give you substantially similar outcomes (in terms of who sits where) to the current model, but with much less passenger anxiety. It also preserves the current “game” of ordering seat selection by check-in times.

    1. This seems like the best strategy.
      They already let you buy boarding position. Adding a further differentiator in terms of the seat would be great.

      My only concern with that is that you then affect an established process-boarding. If you change this, Business select and A15-30 are going to howl if they’re not getting the same seats they’re used to.
      You’d pretty much have to add a new boarding group at the top. There’s added complexity if one goes with a true extra space product like CF was suggesting-you have to make sure those seats are protected so they’d need to board first.

    2. Alex, that’s a great question which will hopefully be analyzed further because I’d love to know more about this.

      I’ve never bought anything about the WN mystique, be it the boarding process (a cluster****), free checked bags (checking bags is the ultimate amateur move), low fares (in competitive situations, I have never found WN to be the cheapest option… not once in 25 years of regular flying).

      Anecdotally speaking, the only people I know who claim to really “like’ WN are in WN fortresses. If you don’t love WN and your home airport is Baltimore or Midway, you’re not going to get very far so I think you just condition yourself to WN style flying and then convince yourself that you like it.

      Every time I’ve been on WN (dozens of times) it’s because they (a) flew nonstop when nobody else did (DCA-MDW) or (b) had a much better schedule (SAN-SJC). The airline biz always comes down to routes and schedules and then fares are a tiebreaker. Everything else is window dressing.

  9. Police report that the “Elliott” gang of analysts have assaulted yet another poor, innocent Y axis. When will the crimes stop?

  10. From their SEC annual filing:
    Southwest Airlines’ value proposition centers around its commitment to providing low-cost, reliable, and customer-centric air travel. The airline differentiates itself by offering low fares, no baggage fees, and a hassle-free experience. Southwest’s open seating policy and friendly customer service contribute to a unique and enjoyable flying experience. By focusing on these elements, the airline aims to attract price-sensitive customers and build long-term relationships with loyal passengers.

    In reality:
    1. Providing low-cost, reliable, and customer-centric air travel. (their costs are equal or at times above the Big 3)
    2. The airline differentiates itself by offering low fares, no baggage fees, and a hassle-free experience. (again their fares are no longer lower compared to the Big 3. And it’s not a hassle-free experience based on the number of comments and complaints about their boarding process)
    3. Southwest’s open seating policy and friendly customer service contribute to a unique and enjoyable flying experience. (They still provide great customer service but their open seating policy worked in the 80’s and 90’s not today, especially with trying to attract business people).
    4. According to the Bureau of Transportation Statistics of the 10 major carriers in the U.S. SW comes in 5th with an on-time arrival of 77.25% (Delta was tops with 83.52% and Frontier the lowest at 78.34%)

    And with their stock price being lower than expected all of these data points illustrate that there is value to be extracted. If the BOD and CEO can’t do it, bring in someone who can

  11. CF is accurate that tinkering with the product could be very costly in the long-term and maybe on a much shorter timeframe.

    The real issue is what has caused WN’s financial performance – and no one outside of the WN’s C suite can quantify the reasons (maybe they can’t either) but Boeing’s delivery delays and lack of certification for the MAX 7 have to be at or at least near the top of the list.

    Those that want to argue that WN’s product is the real reason might want to look at Ryanair, a very large MAX customer and near-exclusive 737 operator. RYAAY stock is down 14% year to date, far more than LUV’s 2%. As LUV stock fell, RYAAY became the 2nd largest airline by market cap in the world but that is at risk of falling to InterGlobe Aviation which does business as Indigo using an exclusive Airbus jet fleet and is counting on even more.

    1. The MAX debacle just is the latest. What about their IT systems, some which are still in use but originated with Braniff. While the larger global airlines try and run their operation like a Three Forks or Smith & Wollensky and the three US carriers run theirs like a Ruth’s Chris, SW still runs a Cracker Barrel level operation. Times have changed and so have the flyers tastes. And there are only so many Junior Samples that remain dedicated to this type of operation.

      1. Bob,
        WN’s IT meltdown cost it money – over $1 billion in lost revenue, customer compensation, and fines from the DOT. WN absolutely did underinvest in IT and ground equipment and personnel which were all contributing factors to the IT meltdown.
        But the operational meltdown would not continue to depress the stock price and earnings unless investors and customers believe it will happen again.

        WN’s stock price is falling because its earnings are not keeping up with the recovery in revenue that SOME other airlines are seeing. And the core reason is because WN, like other low cost carriers, are built on high growth and volume rather than high revenue.
        Further, over the past years, LUV stock has fallen LESS than AAL, JBLU, or SAVE. and LUV’s earnings for 2023 were in line on a margin basis with AAL’s.

        If the premium network model is where LUV should go, then why is AA underperforming so badly and why doesn’t an investor take on American and their inability to turn things around? Why not go after UA which underperformed DL’s earnings by a couple billion dollars despite flying more ASMs?

        Ryanair’s stock started falling when they said they would not be able to grow, their revenues would be impacted and their earnings would be reduced.

        Boeing is doing more to harm the airline industry than any single factor.

        If WN execs can be faulted, it is that they didn’t have a plan B to get aircraft back in 2019 when Boeing missed the certification targets for the MAX 7. But WN execs believed Boeing which has pushed back delivery and certification timelines so many times no one can count them.

        Southwest won’t be the last airline that has falling earnings and WN won’t be fixed w/o getting to the root of the problem which is Boeing’s inability to deliver safe and reliable products when it promised them to its customers.

        as for characterizations of each airline’s operations, you might want to go back to CF’s post on June 10. AA and WN on-time in the first quarter of the year were separated by fractions of a point; WN is now running a more reliable operation than AA.

        1. You talk about Indigo, but that airline has dozens of its Airbus planes parked because of the Pratt issue (a recent Reuters article says more than 70 planes are out of service). By your rationale, shouldn’t they be suffering too? It’s a little silly to say “Boeing is doing more harm to the airline industry than anything else” when the geared turbofan issue is causing major problems at a number of Airbus airlines. The Max mess is a big problem, but I feel that dismissing product and putting almost all of the blame on Boeing is like saying Spirit would be in good shape if Pratt made reliable engines.

  12. Looking at the inter island portion of the analysis. It is good to note that much of this flying has little or no opportunity cost. As aircraft traditionally sit for longer than a traditional turn so they arrive back main land at the correct time for connections. Additionally, SW could also be using these flights to keep passengers on their metal, and drive traffic to their flights to and from Hawaii.

  13. CF – I’ve read your article, and I significantly disagree with you. Southwest is not some charity or religious institution set up to help the masses – it’s a company with shareholders that should be trying to make significant quantities of money.
    Ryanair in Ireland was about to go bust (they were being too nice to passengers) and then turned around after Michael O’Leary (current Ryanair CEO) went to Texas and decided to copy the Southwest model. Ryanair has now become a highly profitable mahine. All kinds of people dismissed Ryanair’s stunts and ancillary fees as something people would not accept… but Ryanair’s market cap has now significantly exceeded almost all airlines in the world except Delta.

    Southwest are just being too nice to passengers. Large amounts of money are being left on the table. The relationship should be commercial, not friendship. Michael O’Leary owes Southwest a favour. It’s time for Southwest management to turn their business around by paying a visit to Ryanair in Dublin, and Southwest learning what it needs to become significantly profitable.

    1. Southwest is indeed a business that should try to make more money. And deliver higher share value to customers. And run a better operation for everyone.

      The problem is that *how* Elliot is proposing to do it is usual corporate garbage that won’t work in the long term and might not even work in the short term either.

    2. Business is about making money, yes. But businesses treating customers like dirt, won’t be in business for long. Businesses make money when customers get a good product at a good price. Airlines generally treat most customers like dirt. Corporate raiders think customers will eat “sugar” to make them more money. Sounds like business disaster.

  14. Elliot invests 2 billion into an airline that needs fixing? Excellent strategy. Take that money and invest it in Boeing, perhaps turning them around will make their stock rebound and they can deliver the aircraft as promised. Southwest has never tapped, and probably never will, into baggage fees which if your looking for revenue in the billions, look no further.

    Don’t hold your breath waiting for Southwest to bow to Elliot. By not bowing to this ideology for the past 53 years and keeping with Herbs philosophy you’ll see another 53 at the top.

    Some things to ponder…..

    1. No bag or change fees like the other “Big” airlines
    2. Don’t like Southwests boarding process? Southwest flies more domestic passengers than any other airline, period. Up until Covid, SWA had 47 consecutive years of profitability. Yep passengers must really hate their boarding process.
    3. After Covid, Southwest, as did the others, had to develop other revenue streams, no longer focusing on business travelers and instead tourism. The business traveler segment has only rebounded slightly due to live streaming without the need to “Be in person” By adapting as usual Southwest was a success.

    Bottom line, Boeing can’t get them aircraft for the forseeable future so look the them to again, adapt.

  15. Elliot can’t do much without the cooperation of other shareholders. It’ll be interesting to see if others go along.

    Signed,

    Captain Obvious

    1. Obvious but true. Their main contribution is likely to be sabre (misspelling intended) rattling.

  16. I don’t know shit, but can someone explain to me why they are not looking at a smaller airplane type? Even a Dash or something? Just run a smaller plane up and down CA to Vegas and such. SFO-RNO, ONT-LAS, Hell, even DTW-MDW or EWR-BWI. Keep everything else the same, no assigned seats, early bird, no food, no snacks. Just pack ‘Em in and let her rip. SFO-LAX every hour on the hour.

    1. WN had the option to do this with the AirTran purchase and decided it was better to basically give the 717 away to DL and shutter smaller markets (e.g. EYW) than to add another fleet type. More recently, it sounded like they were evaluating the A220, but decided against it due to fleet commonality issues. When it comes to (U)LCC operations, the model of one fleet type seems to be the move, and between that and open seating it’s trivial to swap in spare A/C (if they exist) at hub…er…focus cities if a plane goes MX or is delayed enough that it’ll cascade to its next line of flying.

      At the end of the day WN needs to spread its costs across a decent number of passengers, so the A220-300 is probably as small as they’d go…but the backlog for that aircraft is a mile long so you’re looking at 2026 if not later before they could grab those planes. But the fleet commonality issues (vs. “a base just as to work with 737s”) was enough to make Alaska drop Airbii acquired from VS, and WN would be even more of a pain.

      As for smaller aircraft than the 220, WN isn’t the right airline for that, for the aforementioned labor cost reasons, and running -700s on various routes gives them enough frequency that people will fly them rather than someone with smaller planes (though AS *does* have smaller planes…SkyWest/Horizon E75s…that product already exists).

      The thing that’s hurting WN right now is they’re having to keep -700s longer than they’ve wanted because they can’t get new planes of any type, and the ones they can get are oversized-for-thier-model MAX8s due to the MAX7 being in purgatory. If WN could get a new plane with 25 fewer seats they’d be in a better spot, but the carrot of fleet commonality dangling ahead of them means that plane needs to be a 737.

      Now, there *is* a potential quick fix here: buy Xtra Airways/Avelo and Sun Country, then get the planes repainted as quickly as humanly possible. That fleet is still over-indexed on -800s but it’s *something*, and WN could fly the planes harder than either of those two do. Catch there is Sun Country is sitting pretty with the Amazon cargo contract, so the premium for the planes might be a bit much, particularly since all of them are -800s.

      1. I cannot see how the DOJ would allow Southwest to purchase another competitor.

        AA, UA, DL, and WN are all heads and shoulders larger than any of their domestic competitors; it would be extremely difficult to envision any regulators signing off on any of those 4 getting larger via a merger or acquisition.

    2. Cause the juice ain’t worth the squeezin’!

      Loosely translated, let American worry about Dubuque and Appleton.

    3. Small Planes – This is definitely been part of Southwest’s lore, that they only operate one type. The deal for the MAX 7 was a great one, and even though there are better airplanes that are smaller, it was better for Southwest to stick with this airplane. Now that it’s something like 6 years late, it would be tempting to move on and get another aircraft, but there isn’t an opportunity to get a couple hundred airplanes anywhere in a timely manner.

      There is something to be said for the A220 or Embraer E2, but Southwest has held strong against the temptation.

      1. This is something to evaluate from a long-term perspective. Seeing as how the NEXT aircraft WN buys will have no commonality with their current fleet, how much does the Max 7 harm them today +10 years by being inefficient and less capable than the A220 or E2?

  17. Cranky concedes that OK, Southwest needs to have assigned seating so it can sell, if not first class, then longer-legroom seats up front. But then Southwest must keep free bags because otherwise it won’t be “special” anymore.

    It sounds as if Cranky is hanging the entire “specialness” of Southwest on free bags (or at least one free bag).

    Southwest’s differentiated business model stands or falls on one free bag? Remove that bag, and Southwest is done for? Is that really what Cranky is saying? I assume not, but that’s kind of how it reads.

    The remarkable thing about this debate are the relatively small things over which everyone seems to be fighting. Elliott’s presentation also seems to focus on “premiumization” (to repeat part of a JP Morgan quote in the presentation). The agreed battlefield seems pretty small. It’s like everyone thinks that no significant change is possible in any other part of the competitive arena.

    Southwest “owns” really important markets and airports like Dallas Love Field, Chicago Midway, Houston Hobby, the LA Basin not including LAX, Oakland, San Jose, etc. etc. It’s really hard to see its domination of such points critically dependent on any single product attribute, like one free bag. It also still has employees that are a bit more pleasant to deal with.

    It’s less important whether Southwest changes its onboard product than how it would do such a thing. There are definitely ways to completely screw up any change in product, and its quite possible that a new management could do that.

    But that’s as true about implementing assigned seats as it is about free/not free bags. It’s probably easier to screw up an assigned seat change than free bags. A bag is a one time (per one-way trip) charge, boarding directly impacts what a person does for an appreciable fraction of an hour.

    But even if Southwest were to screw that up – if you really like using Dallas Love Field you really only have one choice, and that’s Southwest. There are a lot of other airports/markets that Southwest is in where the same is true. You’re going to fly Southwest, you don’t have a choice.

    1. JT8D – Let me take this one piece at a time.

      > It sounds as if Cranky is hanging the entire “specialness” of Southwest on free bags (or at least one free bag).

      I’m not hanging the entire specialness on free bags, but this is a marketing game. Before, the change fee message resonated as well. That no longer exists thanks to the other airline changes. Now, the bag fee message is the most tangible and cogent message that can be presented. You can’t market something like “our people are friendlier,” because it just doesn’t have that tangible nature to it that helps sway decisions. (It can help in long term loyalty, but that’s different.)

      > Southwest “owns” really important markets and airports like Dallas Love Field, Chicago Midway, Houston Hobby, the LA Basin not including LAX, Oakland, San Jose, etc. etc. It’s really hard to see its domination of such points critically > dependent on any single product attribute, like one free bag. It also still has employees that are a bit more pleasant to deal with.

      In these cases, the airport makes a difference. Southwest’s domination in mid-size former hub markets is legendary and like unmoveable. The problem is that Southwest has to compete in a lot more markets. It has to compete for corporate traffic, something it has prioritized. And it has all these big airplanes with seats that need to be filled that currently aren’t being filled. The network is an obvious selling point for some, but there are plenty of markets where Southwest is competitive that it needs more than that.

      > But that’s as true about implementing assigned seats as it is about free/not free bags. It’s probably easier to screw up an assigned seat change than free bags. A bag is a one time (per one-way trip) charge, boarding directly impacts what a > person does for an appreciable fraction of an hour.

      Assigned seating at least fits within the Southwest ethos of providing a benefit to the customer. Some may like not having assigned seats, but those people don’t have another choice anyway since everyone else does assigned seats. I think assigned seating solves a lot of problems for Southwest. A checked bag fee is just slapping a fee on something that used to be included. We’ve seen this play out many times, but that change would have a real brand impact.

  18. Southwest needs to have a more fundamental reevaluation of its business model than just about whether they charge for a bag or their boarding process.

    For instance, what if they made a major red-eye initiative? How does that pencil out? Does the additional aircraft utilization and juniority of new hires to support that flying reduce costs materially? I don’t know, but if it shows that it moves the needle, they need to consider it.

    They need to think really hard about the 737 and fleet generally. The 737, Boeing generally, is a huge liability. I would hope Southwest’s CEO is in close communication with Boeing’s board about fixing what ails Boeing, with the explicit statement to Boeing that if they don’t make credible changes there, Southwest will go elsewhere. Of course, elsewhere is only Airbus at this point and there’s a shortage of production generally, but frankly, you’d think Airbus would do whatever was necessary to accommodate Southwest.

    They need to think hard about whether they really need the 737MAX7 and the -700. The difference in empty weight between a MAX7 and a MAX8 is 7000lbs or thereabout. There’s a shortage of capacity at key airports – that seems to imply that on the margin they should want larger aircraft. So do they really need the MAX7 or is that just, again, a function of worshipping the old model?

    They need to have a really hard think about everywhere they can reach with a narrowbody. They need to think about widebodies.

    They need to think really hard (as does the rest of the industry) about getting people on/off aircraft faster. Key airports in their network and in the US industry overall are reaching capacity, so that means driving towards bigger aircraft, except the tradeoff is bigger aircraft spent more time at the gate. So how do you break that logjam? People need to think hard about that issue, and Southwest most of all, because slow turnarounds have the biggest impact on shorter flights.

    They need to have a complete rethink, with no part of the model being sacrosanct and all conventional wisdom subject to challenge. And, here’s the thing: this should *always* have been how they run their business, and should be how they run their business going forward. Nothing should ever be sacred. Which doesn’t mean you throw everything out on a regular basis, but you should never do things in your business “just because”, or (in the case of Southwest) because Herb did it (or Lamar did it and Herb embraced it) 30-40-50 years ago.

    Elliott’s not wrong that Southwest’s management is uninspiring. The airline does seem to be going nowhere fast. They do need new blood, but it needs to be people who really have a deep understanding of the business, because it’s quite possible to easily make things far worse if you’re not careful.

  19. A quote from the webbernet which I agree with:
    “Changing for the sake of change is a path to nowhere”

    “Southwest needs to have a more fundamental reevaluation of its business model” Again….SWA flys more domestic passengers than any other carrier. Business model needs re-evaluation? Seems many have their own recipe to fix the unbroken Southwest Airlines yet offer no recipe to fix Boeing. Can’t grow the airline when you are nearly 30 aircraft behind in deliveries. But…”This too shall pass”
    Many read about Elliot’s investment and their proposal and all of a sudden jump on the band wagon saying Southwest is a broken airline and needs fixing but none of this conversation happened before the 2 billion dollar was laid down.

    1. There was plenty of conversation about this before Elliott invested. Even Southwest is having those conversations, which is why it has scheduled this investor day in September to show what it’s planning.

      1. Cranky, as a share holder, over the past few years, I’ve tuned to their annual investor day stream. Always uneventful. You will simply hear why they couldn’t grow (Boeing) My guess is by that time the FAA will have loosened the noose and deliveries will start up again.

        My prediction is….

        1. No change to the boarding process
        2. No leadership changes
        3. No change in Fleet type
        4. Continue no baggage fees
        5. Hiring Freeze
        6. Possible staff reduction. When you forecast growth, you have to staff for that growth, Pilots, AMT’s, Gate agents, Ramp agents etc. which Southwest did yet no new aircraft for these folks.

    2. Just because a company is big doesn’t mean that they are not falling behind or at the risk of falling behind.

      At one point Sears was the largest retailer, IBM the largest “tech” company, and Kodak was a major force in photography.

      I’m not saying that Southwest will fail tomorrow, but I think there’s a solid argument to be made that Southwest senior management has been a bit complacent and (over?)confident in its historical formula and what it’s done in the past.

      If management really thinks that the current situation is just a blip on the radar and that little significant change is needed, fine, but it should have to make that case to investors and potential investors every year, as part of convincing them that management has the right strategy in place.

    3. Southwest may carry more passengers, but Elliot is saying they’re not doing so profitably. There’s a difference.

      Plus the open seating seems to be losing its luster. More and more coverage of people “scamming” the system by saving seats or requesting wheelchairs they don’t really need.

      Yes I know it’s technically allowed but it’s a bad look and leaves many annoyed and frustrated.

  20. Cranky, you say they couldn’t do a Basic Economy, but couldn’t they have a slightly cheaper fare that puts you at the back of the C boarding group (or just create a D boarding group) (i.e. you end up with a middle seat), no carry-on (you have to do the free checked bag), plus no-ticket-changes? That doesn’t seem brand-destroying as long as the website makes it very explicit what you’re getting (United does a pop-up warning).

    Honestly, I think all they might need would be a nationwide marketing campaign making fun of all the nickel-and-diming fees and annoyances at the other airlines to remind people of the benefits of Southwest’s simple, honest approach.

    1. ‘Basic economy where bags don’t fly free.’

      Sounds reasonable to me.

      Thanks for the discussion everyone.

    2. Tory – They could technically do it. They just shouldn’t do it since it’s not consistent with who Southwest is from a brand perspective. As you saw, there have been some branding campaigns, but they just aren’t hitting across the country the way they used to with those big sports sponsorship spends.

      1. Thanks Cranky. They already have ticket levels that give you A1-15 or transferrable credits/full refunds, so I just don’t see how a fourth ticket level with C boarding and no changes/credits suddenly ‘breaks’ the brand – it’s just extending the continuum of the 3 ticket types they have now. I’ll bet if they focus-grouped it, it would be far better received than charging for checked bags or seat assignments. What I don’t know is if it would help SWA move the revenue needle or not.

        1. Tory – Maybe it’s semantics, but I see one as adding value above the standard product and the other as cutting value back. Maybe others wouldn’t see it that way. I dunno. But I do see your point as well.

  21. Regarding the MAX 8s versus MAX 7s, I thought there was a shifting attitude to go with bigger planes. The increased cost isn’t significant and the opportunity is there for more revenue.

  22. The Boeing MAX issues have obviously made Southwest’s issues more challenging, but I think the Boeing issues are way overblown, like maybe 4th or 5th on Southwest’s list of problems. From the Elliott presentation, it appears Southwest has demand issues.

    Problem 1: Empty planes. Flying 12% or your aircraft around less than 70% full. Even accounting for the different fleet mix than they planned for, this is awful. Cranky makes excuses for Southwest on this, but they were at 2% less than 70% full before the pandemic, what happened? The MAX7 delay maybe takes them up to 4% at less than 70% full at most. The other 7% they fly around half empty appears to be pure mismanagement.

    Problem 2: Market Saturation. Following up on 12% of flying at less than 70% full, maybe Southwest has reached domestic US market saturation for folks that like or tolerate the open seating system. They claim they need to grow and blame Boeing for holding them back, why?? They can’t fill the planes they have. United and Delta fill 99% of their planes more than 70% full, even poorly run American only has 3% at less than 70% full. It appears Southwest may need fewer aircraft, not more.

    Problem 3: Seating Problems. Open seating is obviously an anachronism. The disabled pre-boarding/seat saving abuse has made open seating unworkable. Open seating is the number 1 reason by far given by people who won’t fly Southwest. I have no idea why they didn’t change this a decade ago. I am a Southwest shareholder, but I almost never fly them because of the lack of assigned seats and pre-boarding/seat saving abuse. I recently flew Spirit instead of Southwest on a route the 2 airlines I have status on, Delta and United, did not have a nonstop on. The only reason I flew Spirit instead of Southwest was for an assigned seat.

    Problem 4: MAX 7 Delays

    I really hope Southwest acts with more urgency to either figure out how to actually grow profitably, or right size the airline for the demand they currently have.

  23. I know this might be a controversial take but I think Vasu Raja would be the perfect person to come into Southwest. It doesn’t need to be as a replacement to anyone but I think the team could do with some of his forward thinking.

  24. Not sure why the many who hate southwest, want to change southwest, or speak derogatorily about SWA process. I believe most of the SWA loyalist like the boarding process, the free bag, the no cancelation fees, etc. I believe that if these policies change, southwest will lose customers. Customers who like the big airline way of doing business will stay with their big airline of choice. SWA customers, when presented with the same big airline processes, will split their loyalty among airlines….thus a reduction in SWA passenger miles. The reason the stock is going down, is the fear that these changes will take place, and that these changes will lead to SWA demise.

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