Southwest revealed the full details of its plan — called Southwest. Even Better. — to fix itself at investor day last week. Despite the lame name, it does seem like a thoughtful and feasible plan. But what it seems like isn’t really what matters. Southwest has to hit its numbers if its management team wants to stay employed. So now, we wait and watch.
I headed out to Dallas for the investor day along with a couple dozen other media people. Unfortunately, if you listened at home you got the same experience we did. They kept media in a separate room where we just listened to the webcast like everyone else until the execs came in for a Q&A that afternoon followed by a walk over to the hangar to see an aircraft outfitted with the new seats and configuration.
So, what did I take away on a high level? The plan itself seems like it can work, but execution is the hard part. If it does go as planned, this will return Southwest to a respectable level of financial performance by 2027.
That’s not the interesting part, however. What’s interesting is how the airline gets there. There are several components of the plan, so let’s run through them quickly.
- Assigned seating will begin being sold in the second half of next year with a start date of actually flying with assigned seats in the first half of 2026. There will be no slow rollout. One day the whole network is open seating, and the next it’s assigned.
- Extra legroom seating will be fully installed and available at the same time as assigned seating across the fleet.
- The network will be adjusted to improve connection capability, shift flying from Atlanta to Nashville, and reduce Hawaiian flying.
- Interline agreements are finally coming, starting with Icelandair in 2025. Southwest will start by letting Icelandair sell connections on Southwest flights via BWI but it will expand from there. (If this sounds familiar, Southwest dipped its toe in these waters 30 years ago.) Eventually it will expand to include booking via Southwest on other airlines and frequent flier earning and burning.
- Getaways by Southwest will launch as a new internal vacation package product that replaces the outsourced Southwest Vacations with flexible bookings that if canceled, go into a credit that can be used as a normal Southwest credit for flights.
- Productivity will be increased by shortening turn times, flying redeyes, and working on more digital tools so travelers can help themselves.
- Employment will be reduced through attrition but no layoffs. The end of this year should have 2,000 fewer people working for the company than the end of last year.
- On the cost side, Southwest will spend a whole lot less on airplanes over the next few years, dropping those capital expenditures from an expected $2.1 billion per year to $0.5 billion.
- Southwest is also obnoxiously doing a $2.5 billion share buyback program which I hate, but shareholders will like it.
What’s not on here is any change to the bags fly free policy of having two checked bags. Southwest has done what seems to be an exhaustive amount of research — probably too much — and calculates that it would actually hurt the airline to do that with loss of share and brand hit. Considering how much everything else is getting closer to a Big Three airline offering, I don’t disagree with this being important as a standout differentiator.
All of these changes combined with fixing revenue management problems and improving marketing will result in a $4 billion improvement in earnings by 2027.
This is a lot of money. But of course, this is a lot of change. We can try to pick it all apart and test how feasible it is, but there’s no real way to know how much revenue this will generate until it’s put into place. On the surface, the numbers seem somewhat conservative. Ultimately this is what Southwest thinks it can do, and now it has to prove that it can.
Elliott, the activist investor that has been trying to kick out Southwest management, has so far been publicly unimpressed with anything Southwest has done. Southwest CEO Bob Jordan repeated during our Q&A that Elliott has shown no interest in working with management. It’s pretty clear that Elliott has no faith in Bob being able to make anything work, so it has no interest in entertaining any plan that involves him. But Elliott only owns a little over 10 percent of the company so it can’t make that happen alone. It needs other investors to go along.
When you combine all the board changes Southwest has recently announced along with this plan, it does show an airline trying to make large, sweeping changes, especially to governance which has been a broader concern for investors beyond Elliott. If I’m any other investor, I’m pretty happy with the board changes, and I think this plan is doable. I would be willing to give management the runway to make it happen, because any new, big change in management would just throw the airline into chaos and slow down progress.
I don’t expect anyone to wait until 2027 when the plan is complete to see how it turns out, but I do think it’s worth waiting at least until the May annual meeting for the airline. By then, many of these initiatives should have paid dividends, and we should know if the big change to seating is on track to actually start selling in the second half of the year as planned or not. If nothing else, all the work Southwest has done lately should have bought the airline more time with investors not named Elliott.
In short, Southwest has put together a solid plan, but a plan is only half the battle. Now it needs to stick to dates and generate the financial improvements it promises. It’s already off to a good start with revised guidance for Q3 that it issued on investor showing unit revenue for the quarter will now come in up 2 to 3 percent instead of the previous expectation it’ll be flat to down 2 percent.
I’m going to dig in on more of these initiatives over the coming weeks, and we’ll start tomorrow with the biggest change: assigned and extra legroom seating. The airline had an airplane mocked up for us, and it gave a surprising number of details on how and when this will all happen.
46 comments on “It’s Time for Southwest’s $4 Billion Plan to Sink or Swim”
I do think it will improve customer experience for the all important business customer, while keeping enough of the leisure class customers happy with 2 bags fly free.
Most importantly, I love getting rid of free for all seating…
We like the free seating, and are actually seriously thinking of cancelling our Southwest Rapid Reward Credit cards due to the loss of it. If they pre-assign seats like all of the other airlines, we’ll basically nearly always end up with our choice of middles. Noone wants that.
Just as an FYI my wife and I checked in to our southwest flight 2 minutes after check in time, and got assigned B60 and C1. Fortunately for us my wife is 34 weeks pregnant so well use preboarding, but it’s not hard to see why southwest research showed the overwhelming majority of fliers wanted to do away with the practice
That means a lot of people on your flight paid for early boarding. Will be curious what the take rate will be for paying for assigned seating verse current early boarding.
Comments like this are stupid. It’s not like leaving SW will resolve your issue regarding open seating. Who else offers it? It’s like when people wait too long for their fast food; their issue is it’s taking too long, so they cancel out of spite, but then they go somewhere else and place a new order and self inflict an even longer wait time for themselves. Make it make sense. I’m also unsure as how you ONLY get middle seats on other airlines. I fly 4 to 8 times a month, have booked months in advance and sometimes just hours in advance, and maybe only once sat in a middle seat on a last minute booking; I will also select flights that have desirable seats open prior to booking if my flexibility allows it
I dont have faith in shorter turn times. I can see the schedule getting delayed and a lot of missed connections, especially if the weather is not perfect. I am hoping this does not lead to another system meltdown Southwest has experienced over the last 4 yeats. Longer turn times were implemented to reduce delays.
If WN was subject to EU261 penalties, they would be investing more into redundancy (IT and longer turn times) into the system than just hoping for perfect outcomes and doing a $2.5B buyback. Investors need to make a return, but flyers don’t need another Christmas meltdown or being stranded at airports overnight.
To be clear, the shorter turn times are an internal effort to speed up how fast a plane turns. They showed off a lot of the tools and tech they are using to make that happen. But not all flights will be scheduled with a shorter turn time. So this is more about actually speeding up the process in the beginning. If it works, I’m sure they’ll tighten up the schedule more.
Need look no further how shorter turn times worked for JetBlue. They expended turn times under Johanna Geraghty at the helm and paid off ever so incrementally with much better otp this year compared to last. This will hurt southwest.
@CF I really don’t understand why Southwest brought AirTran. From the beginning Southwest has been slowly reducing the airlines Prescence in Atlanta. They never really see to have tried to take on Delta. AirTran was a scrappy with a new fleet. They were good at what they did and had a good customer experience.
So, here we are, down to 11 gates. That is only a third of one concourse. When they took over AirTran they had all of concourse C (35 gates) and some overflow on concourse D. It just seemed like a waste of money on Southwest’s part.
I also don’t understand WN’s purchase of AirTran. I never considered them a “strong” airline (your word “scrappy” is good way to to put it) in terms of finances and being able to fiercely complete with Delta and the big boys, and AirTran had some very high-profile crashes. AirTran knew its niche, however, and flying AirTran wasn’t a bad experience at all, certainly better than many of today’s (U)LCC airlines like Spirit.
With WN pulling back from ATL even more, and with the focus on WN, the time seems ripe for a deep dive “look back” analysis/discussion article on Southwest’s purchase of AirTran.
AirTran never had a Hull Loss – It’s merger partner ValuJet did
History of AirTran below
https://en.wikipedia.org/wiki/AirTran_Airways
To Clarify: AirTran never had a Hull Loss (**due to a crash). They had at least two aircraft written-off post ValuJet merger after emergency landings. Both were DC-9-32s – It’s merger partner ValuJet did have a Hull Loss due to a Crash and was shutdown.
BarryATL – I think it’s pretty simple. Southwest eliminated a lower cost competitor. Of all the mergers that have happened in the last 20 years, this was by far the most anti-competitive.
Southwest has an excellent balance sheet and half of all shareholder value has been wiped out due to the incompetence of management.
Stock buybacks should have been announced years ago.
Similar to what occurred at United or Jetblue, shareholder activists deserve credit for the “shock therapy” that they gave management.
The board and C-suite also deserve credit for seriously considering changes to the business model, even if many aspects (ie bag fees) did not change. How they managed to overwhelm the cult-ture is impressive.
Unless Elliott Investment Management figures out a way to blackmail someone again, LUV should be fine for the foreseeable future.
I’m really curious to see tomorrow’s post to see how the assigned seating rollout will work – no slow rollout but clearly they can’t add the extra legroom to all planes overnight. So this seems like it will cause boarding chaos for the period where it’s unassigned but some people will be getting extra legroom for free.
Could get ugly. Especially when seat savers block premium rows and FA’s just shrug. It weaponizes lying about disabilities.
The reason “they” shrug it off. Is because Southwest has burned it into their heads that they do not have premium seating so anyone can save seats. Trust me when I say this. It infuriates them like you wouldn’t believe. But they get tired of fighting and get no backing. That one is on Southwest. I mean if I had my way. It would be different.
Shifting a lot of flights from Atlanta to Nashville, a lot of Atlanta based crew are pretty unhappy about this. Me too as my Delta flights will get even more expensive I guess.
United forced WN out of EWR and DL is doing the same at ATL. It is tough to compete against carriers in fortress hubs. Nashville does make a lot of sense since it is already is a LUV focus city.
I’m disappointed out the shift out of ATL as well, as I fly to ATL at least once a year on my own dime. AirTran was a great option back in the day, and while WN’s prescence at ATL has been pretty light for years (WN gutted many of AirTran’s operations at ATL pretty soon after the ‘merger’ [sic], as I recall), it at least kept DL honest.
It’s a shame that DL has just about every politician in the state in its pocket, because with the infamous Atlanta-area traffic, an airport north of Atlanta (on the opposite side of the metro area as ATL) could probably support a number of ULCC flights and even a few daily UA/AA flights to hubs, plus steal some pax from Chattanooga.
According to some AirTran was losing money in ATL and its future was uncertain, so they approached SWA.
See, what I haven’t seen anyone mention is that the Southwest model did not actually fail.
Demand for travel has done nothing but grown over the years. In fact, revenue at LUV is at an all time high.
The problem is costs. Granted, they’re not the only airline to be impacted by this, as all the airlines in the world has had costs (fuel, labor, interest rates) rise.
Yes raising revenue was the right solution, but it’s something to keep in mind.
They’ve addressed costs here as well; “shortened turn times” is usually shorthand for increased asset utilization, offsetting fixed costs, and wringing more productivity from workers. Will any of it work? Time’ll tell.
Actually, the model did fail. They got bullied out of Atlanta. The egalitarian cabin didn’t take. People wanted optional seating buy-ups at comparable – or identical – base fares.
What short memories everyone has these day. Let’s look back for a moment. It was SW that gave consumers broad based sustainable low fares, no fees , free checked baggage, high frequencies to destinations and the friendlest flight attendents in the industry. It was SW employees who broght back the smiles, mailed free drinks and birthday cards to customers and helped Mom’s and kids down the isle with a smile and a helping hand. Lets not forget, all the military guys and gals flying home for the holidays, who were welcomed aboard with a smile and a song. I have flown over 4 million miles on other airlines and can count on my hands, the memorable flights I had on the legacy carriers. You never knew what to expect on SW but it was always a good story. Yeah, SW had their problems with growth over time but who hasn’t. It’s a sad day when a corporate raider can come in and try to take down an iconic airline that was a friend of the common traveler. You are dreaming If you think you are going to get reach buying stock in the airline industry. Elliott like Icahn is another corporate raider looking to make a fast dollar and get out.
If that happens, the real looser of this story will be the consumer.
Screw Elliott. They wouldn’t know the difference between a health insurance claim & a baggage claim.
The Iceland air thing. Ouch. Fares to Europe are already cheap most of the time, and, from he east relatively short. You could fly, for example MCI-BWI-KEF-ORY and take like 15 hours and 3 flights in coach for $800 or whatever they are going to charge. Or just do MCI-ATL-CDG for $500 or whatever the sale of the week is.
I am not a high paid airline person but I just cant imagine a scenario as a traveler where connecting to Iceland Air is a good idea, unless my destination is KEF
Unless you’re like me and BWI is already your home airport. I’d love to be able to use WN points to go to Europe. As they add more cities from the U.S., the one stop in Iceland won’t be so bad.
Iceland is a super-hot tourist market. Not a bad idea at all for WN.
Most “hot” markets cool off eventually. Icelandair is a non-Allianced carrier and one of the few TATL players of any size that WN could partner with. I feel this is a toe-in-the-water move for an eventual second fleet type with WN offering their own TATL services down the road.
> I feel this is a toe-in-the-water move for an eventual second fleet type with WN offering their own TATL services down the road.
That’s a very interesting theory that I haven’t heard yet. Should be fun to watch.
I don’t know how they will shorten turn times with assigned seating. Maybe this is based on old data, but I thought Southwest’s open seating was the most efficient way to get people on to a plane (I think even Mythbusters did a segment on this). Assigned seating will lengthen the time to get people on to the plane. They’ll have to make improvements elsewhere I guess.
My thought is shortened turn around times with less pre-boards. There are a lot of legit ones but also some who game the system to not get stuck in the middle. I was just on a flight to PHX, it had 20 wheelchairs and a senior couple arguing with the gate agent that simply being senior citizens should make you eligible for pre-board. She made them wait for between A and B. When we got to PHX, they only needed 3 wheelchairs. But my point in all of that is it took an extra 20 minutes before we could start boarding. Even if that could be cut in half, 10 minutes saved could make a huge difference across the network. Though I would also add it depends on how many groups they are going to board with when they switch to assigned seats.
Vinay – Actually, this may speed things up because they are keeping boarding the same. I talk about this a little more tomorrow, but they can construct boarding to work however they want by keeping the poles in place they use today. How they organize people will give them a lot of power.
Wow. This plan is crazy. Giving shareholders $2.5 billion, and cutting back the new frames budget by $1.5 billion. OK… eventually frames are very expensive to maintain. And the renewal is being delayed further, and $2.5 billion in capital given back? No No No. The smart move is to renew the fleet and cut maintenance costs, not give capital back to shareholders.
CJ – To be clear, they have an absurdly large orderbook. They have over 700 airplanes on order right now. So this is about massive growth and not fleet replacement. They are just cutting back on growth.
I accept your point, and it is known that growth prospects are limited for LCCs at this time. Building on what you stated, the new budget represents the pace at which SouthWest can reasonably renew the fleet? However, I still would not buy back shares, paying down debt would be better for the carriers future. With lower debt levels interest expense would be lower, and the balance sheet would be flexible to facilitate a continued effort to renew the fleet.
Good ideas: generate more revenue via assigned seating with extra leg room seating. Focus on strongest SWA airports: Dal, Hou, MDW, BNA, BWI, STL, OAK, LAS, and PHX. North south flow handled via BWI and BNA — just overfly ATL. East — West Den, MDW , STL, DAL. Out west North South OAK and LAS. Again, move resources to cities of strength and limit airports where your routes are unprofitable.
Fix the schedule: Use a rolling hub model at your large airports. For example: DAL you can run 210 flights per day with 12 flights per hour from 7 a.m to 11 p.m and 18 flights in 6 a.m. hour since all 18 SWA gates are available. Once the flow has started, SWA would use only 12 gates per hour leaving 6 open for delays and allowing 45-minute turn times. Example: 3-flights each scheduled to depart at 8 and 8:05 a.m and 3-each at 8:30 and 8:35 a.m. Connect times for majority of flights 45, 1:45, 2:45. I have done working models for DAL MDW and DEN (400 flights) all by pencil and paper. With the use of technology SWA could make outstanding schedules to maximize all resources and could also simply create out and back models and the largest hubs.
I think the move to paid-for assigned seating is a good one. Yes, there will initially be problems… but there are enough people with brains at Southwest for them to fix whatever problems occur. If large numbers of other airlines of a similiar size can make huge amounts of money out of assigned-seat fees, then Southwest can (and SHOULD) do the same. To those who moan that they don’t like it… well Southwest has been leaving money on the table for far too long and now it’s time Southwest management remembered what stockholders are.
Let’s cut to the chase here.
This is a corporation whose shareholders are saying you don’t make enough money, and we want you to take steps to make more money or we will replace the board. That’s the bottom line – they are crying the airline does not make enough money.
Such a scenario is NEVER good for the consumer. It will cost you more to fly them, and you will get less for your dollar, be it cleaner, newer planes, service, or culture.
Greed is not good.
Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed in all of its forms. Greed for life, money, love, knowledge, has marked the upward surge of mankind
Stock buybacks rob aviation of capital. They should be illegal!
Aviation gets capital from investors only if investors think they will get a good return on their money. Or would you prefer that startup airlines be unable to raise the capital to get in the sky at all ?
Warren Buffett once said, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.”
Why is it taking years to implement red eyes. The pace is glacial and indicative of how they are not really onboard with it and only doing it for show.
They start in February.
Great write up.