Elliot Investment Management and Southwest Airlines

The US airline market is buzzing today. A great place to start on this story is Bill Swelbar's comment. Southwest has been through a rough patch. But then again, which airline hasn't? Elliot Investment Management's (EIM) move will create a kerfuffle, no matter how this ends. How vulnerable is Southwest Airlines? We toured various data sources and concluded that Southwest was doing pretty well without EIM's attention. Arguably, the most critical metric among airlines is the ability to produce a seat at the lowest cost. If you can do that, all things being equal, you can drive market pricing. That does not mean cutting fares. It means you cut when you want to win traffic where it suits you. Otherwise, you follow market prices and make better profits. These profits can then be used to underprice the markets you want. [caption id="attachment_84062" align="aligncenter" width="422"] DoT p5.2 & T2; AirInsight[/caption] The most recent data shows Southwest as the low-cost provider among the listed airlines. The chart below shows the same data in curves, and the competition between Southwest, Spirit, and Alaska is tight. [caption id="attachment_84063" align="aligncenter" width="580"] DoT p5.2 & T2; AirInsight[/caption] The key takeaway here is that Southwest is in a strong market position. In the mature US airline market, this means Southwest gets to drive the industry in several markets. In other words, this is something EIM should not disturb. Since all the airlines suffer the same input costs, essentially labor and fuel, how does that show them? The chart below lists aircraft operating costs as a percent of total operating costs. [caption id="attachment_84060" align="aligncenter" width="580"] DoT P7; AirInsight[/caption] The chart shows Southwest as fourth from the bottom in 2023. Of the three below Southwest, Alaska is the credible threat. AirInsight ranks Alaska, along with Southwest and JetBlue, as LCCs. In airline economics, economies of scale are very important. The bigger the airline, the more market power it has. For example, the biggest airlines pay less for fuel than smaller airlines. Volume solves challenges. And it's not just fuel. The other key input cost is pilots. [caption id="attachment_84065" align="aligncenter" width="580"] DoT P6; AirInsight[/caption] Network airlines are attractive to pilots because of the opportunity for career advancement. As noted above, size brings advantages. When it comes to size, Southwest is equal to the big three in several ways. The following chart shows the US domestic system. Between 2000 and year-end 2023, Southwest grew steadily and became the biggest carrier in ASMs. Southwest flies one kind of aircraft and has no widebodies. This performance screams superior performance. [caption id="attachment_84066" align="aligncenter" width="580"] Dot T2; AirInsight[/caption] Last year, Southwest took delivery of a new 737 MAX 8 every four days. Why is this important? The biggest cost input for airlines is fuel. The next chart shows how Southwest has been more fuel-efficient than its competitors. Those new MAXs drove MAXs and brought down fuel burn, generating better seat miles/gallon at Southwest. New aircraft also come with maintenance holidays, driving down costs even more. [caption id="attachment_84067" align="aligncenter" width="580"] Dot T2; AirInsight[/caption] In hard numbers, we make the case that Southwest is doing well compared to its peers. In soft terms, Southwest has something of a halo as that "little airline from Texas." The numbers show this is no small airline today. But Southwest has managed to capture this image. Southwest has things to fix, like IT and dependence on the aging 737-700s. The former is relatively easy and expensive but fixable quickly. The second item will not be fixable soon, but Boeing will compensate for the missing MAX 7s. Moreover, Southwest's management is not immune to criticism. The key item that EIM must avoid is annoying the airline's employees. The pilots and flight attendants are annoyed at the management, but that does not give outsiders an opportunity. Airline employees know all too well what comes with "turn-around" investors focused on their jobs as a function of numbers. Airlines sell services. Many employees are customer-facing. The late Colleen Barrat was the company president. Read about this woman and get a glimpse of what EIM is messing with. It might be better if EIM left this one alone. Even if they "win", the employees will not allow their culture to be disturbed.

US Flight Planner - US DoT On-Time Data	Airbus vs Boeing - Official OEM Data
US Airline Schedule Performance - US DoT Data	Daily OEM Production & Deliveries -

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