broken heart
The forthcoming Southwest Airlines Investors Day is going to be awkward and interesting. Things have not been going smoothly for a while.
Elliott Investment Management created uncertainty when it took a stake in Southwest Airlines. Before this, Southwest experienced an operational meltdown in 2022. The DoT fined the airline $140m for this debacle and ensured the airline refunded $600m to passengers. The penalty is 30 times larger than any in DoT history. Perhaps it was this fumble that caught Elliott’s eye. At the time, we found Southwest misfiling its DoT data.
Elliott lays out its case on a custom website. How much of this criticism is valid? Unfortunately, it’s more than Southwest’s management wants.
As the US airline industry consolidated into three network carriers plus Southwest, the margin for error has shrunk. It used to be that Southwest, being the lowest-cost seat producer, set market pricing. But Southwest is no longer the low-cost seat producer it once was. Here’s our data model with industry snapshots based on the DoT’s data.
The Boeing Angle
The airline has been experiencing changes that have impacted its business. The following chart lists its flights by aircraft type.
Being exclusively Boeing during the past years has proven to be a mistake. We referred to this in January 2022. In February 2021, we considered what might happen if Southwest derisked its fleet by bringing in the A220 rather than the MAX 7. In March 2021, the airline stuck with the MAX 7. The decision to stay with Boeing was an “own goal.” Southwest was not the only airline that made this mistake.  Even if A220 deliveries were too slow for Southwest’s needs, it would now have some aircraft of the size it needs. The 737-700 fleet, which is the right size and serves more than half the airline’s routes, must undergo an expensive MRO process.
Even if Boeing gives Southwest credits on future deliveries to offset the much-delayed MAX 7, that deal might look uncertain given Boeing’s challenges. Based on the latest financial disclosure, one source estimates Boeing’s Probability Of Bankruptcy at 33.0%. Richard Aboulafia from AeroDynamic’s view on the chances of Chapter 11 as: “Zero, Zilch, Nada, Not a thing.” Perhaps the concern is overdone, but the Boeing strike costs $100m daily.
Southwest’s Boeing problem is worse than before. When will the strike end? How much delay is there on the MAX 7 now?
The Competition
Southwest’s competition has worked hard to strengthen its financials. Southwest no longer has the same market power. Southwest is expected to make some big announcements at its Investors Day. How much does Southwest win by assigning seats, even premium-priced larger seats? Cabins must be redesigned, and that will take time. Meanwhile, premium customers can get that today on American, Delta, and United. Can this move by Southwest move the market?
The chart illustrates that the big three benefit from extensive networks stretching globally. Southwest remains largely a domestic airline, albeit the largest domestic carrier. The data suggest that Southwest is less likely to move markets as it once did. Last year, Southwest reported a record revenue of $26.1bn. Its $465m profit was about one-tenth of Delta’s. Today the airline announced it is cutting Atlanta flights by a third, and Atlanta is the world’s busiest airport.
The following chart underscores Southwest’s position in the market for 1Q24. The industry is doing well, and traffic remains robust.
Forced Changes
Southwest’s management would likely stay the course if they could. They need time to make changes and get the airline back to where it could be: the market maker. But Elliott swooped, and time’s up. The changes coming now will happen because of pressure from outside, specifically from Elliott. The board has already seen several members resign.
The significant advantage Southwest could fall back on is its robust culture. The company’s culture is powerful, as this story demonstrates. That culture is going to be tested.
As a frequent flier on Southwest, I think it will spell disaster to assign seats. It’s nothing more than good old American greed at the expense of the customer. But, that’s nothing new in these so called United States. The rich keep getting richer at our expense.
I agree, I’ve been a loyal customer of Southwest Airlines for years. As well as many of my family. We’ve loved the loved the model of unassigned seating because of the low cost flights.
We’ve found that the fares have not been the lowest recently however.
I still think assigned seating is a mistake for Southwest. It’s what set them apart and allowed the low fares.
Right now I think most people likes the way Southwest handles it’s customers
For me if Southwest don’t go there I don’t go there
I really enjoy Southwest and getting to pick my own seats
I am 86 Most of the time I try to get to the back of the plane
And get a window seat
1. close to bathroom
2. that is where most of the families with children sit and that does not bother me
3. People who wants to get off the plane quicker can sit closer to the front
I really hope they do not make too many changes
can’t blame em for trying to make more money. but they aren’t gonna be making more. they would be competing on an even basis with the exception of bags fly free. they have no edge other than that. it’s big edge but that will change too. people will continue to fly for awhile with swa but will soon hit the airfare discount links instead of just going to swa website. not a family anymore as employees described it!!!!!