Southwest Airlines has completely upended – and some would say, destroyed – its business model. They’ve started charging checked bag fees. They’re charging for seat assignments, for flights beginning in January 27. They’ve started expiring trip credits, selling basic economy fares, and they’ve devalued their points.
The airline has also done its first company-wide layoff in its history. Even during the pandemic they didn’t furlough workers. And they’ve started financial engineering, selling planes and leasing them back while leveraging their investment-grade balance sheet with stock buybacks.
This is laid at the feet of activist investor Elliott Management, which has taken effective control of the airline’s board despite holding less than 15% of the airline’s stock. They haven’t made money on this investment over the past 15 months of their involvement.
However, Brian Sumers makes the case that Elliott has been good for Southwest. I don’t agree, but there’s certainly a sense in which he is not wrong.
I think this relationship is turning out OK for Southwest (less so for Elliott, which is far from reaching the 12-month stock price target of $49 that it set when it bought its first stake in June 2024; shares closed Tuesday at $31.91). In fact, you might even call me cautiously optimistic about how Southwest has evolved since Elliott’s initial investment.
..But do I really need to remind you how stagnant and risk-averse Southwest had become in the Gary Kelly and early Bob Jordan years? It had become one of those giant, bumbling bureaucracies that Herb Kelleher would have hated, where few people wanted to make a decision, or go against their bosses, for fear of upsetting the status quo. For mid-level executives (I have been told), it was best to just go along with it, because compliant employees would pretty much get to keep their jobs for life.
Sumers is clearly correct that Elliott Management has shaken Southwest out of its complacency. Many of the airline’s top employees have left, such as (and I don’t see this as positive):
- Ryan Green — Executive Vice President & Chief Transformation Officer
- Tammy Romo — Executive Vice President & Chief Financial Officer
- Linda Rutherford — Chief Administration Officer (and longtime comms lead)
- Jonathan Clarkson – Vice President & Chief Product Officer
CEO Bob Jordan has stuck around, but his word doesn’t mean much anymore. Jordan went from promising – directly to customers in writing a year ago – that the airline would never impose checked bag fees, to moving to implement those quickly.
They’re retrofitted planes for extra legroom quickly, with 737-700s not beginning until after Thanksgiving (so they don’t lose seats for the peak holiday rush) but with a plan to finish in only a matter of weeks – in order to hit paid assigned seating in January. Their rollout timeline for free wifi was far more aggressive than American’s. It was important to solve for the complacency!
There’s are two different ideas that seem to get conflated a lot with Southwest.
- Southwest became sclerotic, and needed to be shaken out of complacency. This is both true and seemed pretty obvious, and I think most realized it at least after their December 2022 meltdown.
There was no excuse to still be printing out paperwork for each departure! They didn’t get their tech house in order for partnerships. They weren’t selling through online travel agencies which meant missing out on demand from one side of each market in most cases (anywhere their presence was small, sales were largely driven by the larger market, their loads were far less evenly split than most other airlines). It has meant not benefiting from points purchases through travel portals like American Express, Capital One and Citi.
- Somehow Southwest needed Elliott’s prescriptions to return to historical financial performance. The specifics of basic economy and charging for bags and devaluing Rapid Rewards and expiring travel credits, undifferentiating the brand and following a business model of American and JetBlue hardly seems a recipe for financial outperformance when they leave themselves with an inferior product even. “The same but less than” and with less revenue potential doesn’t work.
The criticisms of Southwest largely ring true. Elliott employed those to gain control. The specific recipie for the business doesn’t offer much hope.
The truth is Southwest would have been far better off had the Biden DOT’s airfare display rule not been enjoined by the 5th circuit – they could’ve marketed through OTAs without introducing bag fees and basic economy, without being at a price disadvantage, because airfares would have been required to be shown with checked and carry-on bags etc.
However, Southwest probably will never return to historical valuations because they’re no longer a growth company, having maxed out their model – to grow they need complexity like a more diverse fleet to service different markets and more seating types and lounges but that drives up costs as well and simply involves industry mean-reversion.
A non-complacent Southwest would have moved to online travel agencies earlier, and maybe that means checked bag fees and basic economy so in the absence of the abandoned DOT rule on airfare display, in order for passengers to be comparing ‘apples and apples’ when looking at Southwest prices and competitor prices.
I have to think that a non-complacent Southwest would have diversified its fleet to enter smaller markets and build connecting feed and potentially enter long haul markets as well. It would have added airline partnerships both to sell tickets to its passengers where they wanted to go, and also to deliver the awards its credit card customers desire.
What that all likely means is that the the one thing Elliott has done is shake the airline out of complacency. The prescription may fail, but the lack of a solution is hardly Elliott’s fault because there isn’t one. The reason Southwest isn’t a great investment anymore is that it is now just an airline, but there really wasn’t a viable alternative to that. They’d have been better off recognizing and acting on obvious trends in the market much earlier. But there aren’t really levers to pull that make Southwest the Wall Street darling that it used to be, and the airline that went 47 consecutive years without losing money.
If that’s true, then the airline’s specific changes are almost beside the point, because in the end Southwest’s prospects simply aren’t what they used to be and won’t be again. They’ve just gotten as much out of the model as there was to get. They didn’t know what to do next, so they didn’t do anything. They froze. Now they’re unfreezing but there is no real recipe to replicate past success.
Some of their current changes they should probably make, others not so much, but the sad thing is ‘be like the rest of the industry’ is all there seems to be here – but maybe that’s all there is for a mature carrier like this one.
You can dress it up all you want – Southwest has alienated 95% of their customer base. What made Southwest the best airline for 40+ years has seen this group of bean counters destroy in the past few months. 40+ years of only flying Southworst will end after my last scheduled flight Jan. 21st.
Although I’m a longtime SW user, I don’t care that much. I’ll still pick the best option when I need to fly somewhere. As of today, the ATL-LGA nonstop route is my most frequent, and SW still beats UA on schedule and Delta on price.
It will take a good year to judge the financial impact of the changes. Open seating for sure seem to have become a problem. Maybe boarding “disabled” passengers last (if that’s legal) or requiring medical documentation would have cut down on the abuse.
I purchased my tickets 6 months ago for a flight last week. They clipped me for a 2d bag fee of $35 each ((A lister) for three flights – even though it was FREE at the time of purchase. I switched my last flight back to AA for the last leg for my free bag and a free first class upgrade. Wave goodbye SWA!
Elliott (mis)Management… nuff said. ‘Greed is good’ again (until it isn’t.)
Broke clocks, like @David R. Miller, are right twice a day.
One thing people aren’t really talking about with Southwest’s bag fees is the tax angle. Ancillary fees don’t get hit with the 7.5% federal excise tax that fares do, so shifting revenue into baggage charges isn’t just about new money, it’s about keeping more of what they already earn. That loophole gives them more room to play with pricing and is a big reason why the move makes sense financially.
The flip side is complexity. Southwest’s whole magic trick has always been keeping things simple. Bag fees, seat assignments, and new fare buckets equals slower operations and more customer friction. Even if once the fee money rolls in, they risk losing the very efficiency that made them stand out in the first place.
And honestly, if Southwest really wants to survive long term, it’s going to need a true domestic first-class cabin. I’ve made this point many times before here. The market has shifted hard in that direction, with airlines adding premium seats at three times the pace of economy since 2019 and making most of their profits there even when demand dips. “Extra legroom” rows aren’t going to cut it. To compete for business travelers and high-yield routes, they need wider seats, real premium service, and priority treatment. That’s where the margins are, and that’s how they can evolve from just being the low-fare carrier to a hybrid model that has both volume and yield.
“One thing people aren’t really talking about with Southwest’s bag fees is the tax angle.”
I’ve been writing about this for more than a decade 🙂
Brian Sumers proves his own point wrong, precisely because the data he presented shows the opposite case to be true. His entire argument is this: “Last week, I had an interview with CFO Tom Doxey that affirmed my view that Elliott’s investment in Southwest is a net gain because it quickly forced a shift in culture at the airline that might not otherwise have come”. The two critical terms are “net gain” and “culture shift”. Let’s start with the premise (believed by many industry insiders including Gary) that a culture shift was required. Fair enough, those happen all the time without takeovers by the likes of Elliott. Triggers instead could have been an industry conference, consultants, or even a late night weed and drinking bash. Whatever, it could have come cheap. The term “net gain” is telling, as it confirms the lie that this was anything but rainbows and unicorns, and what little improvements came with a heavy cost.
Southwest was a better than average thing for the average person looking to travel around America where you could still sometimes experience friendly service. Now it is not so much that. And it has quickly lost its positive brand identity. Also, hard for employees who just saw a bunch of people around them let go to care about providing service for the benefit of Elliott when the entire ethos of the company is gone.
It will in the near term continue to make money flying people around America even though it has alienated its customer base and employees. But other than shaking the tree and copying the rest of the industry, it doesn’t seem to really know what it wants to be. Will take a long time to be an international airline, if that’s truly what it wants to be, and no guarantees of success. And if there’s no discount to AA/UA/DL pricing, it may find itself in an even more awkward place in the market as its loyal customers don’t care about them anymore and become free agents.
@Gary – Fair point! You’ve definitely been way ahead of the curve on the tax arbitrage piece. What struck me this time is how it ties into the broader picture: fees aren’t just about finding new dollars, they’re also about reframing old ones while Southwest simultaneously layers in operational complexity. That’s why I think the real story now is whether they can balance this new revenue structure with efficiency, and eventually, whether they can finally make the leap into a true premium cabin to stay competitive.
@Peter — Well said. It’s a real shame. Private equity has done this to other airlines and industries before, and it’s usually the customers and the workers that suffer. It’s especially disappointing as the loss of Southwest would reduce competition in this space. Even if you never fly LCCs, we all should want more competition and more options as consumers.
@Mike Hunt — So, do you really still think SW will go for an actual First Class? I doubt Elliott will allow real investment in new hardware like that, but, if they do, go big, lie-flat!
WN is the airline example of the way to boil a frog is not to throw them into a pot of boiling water but to put them in a pot of cold water and slowly turn up the temperature.
WN acted too slow to address a very dynamic industry esp. post covid.
I think Brian is more right than not. WN needed someone to tell them they were being boiled alive.
and let’s also not forget that all of these changes are going to take time to see whether they work; the sheer number of changes makes it very hard to measure the success of any one strategy