Activist Investor Takes $2B Stake In Southwest Airlines, Plans To Demand Changes

Activist investor Elliott Capital Management has taken a nearly $2 billion stake in Southwest Airlines, and plans to push for changes to their business. That’s a huge investment for a carrier with a current market cap of about $16.5 billion. It should earn them board seats.

Southwest Airlines is struggling financially, but is still heavily prized by the market relative to its economic performance. The market seems to think the carrier’s fortunes will turn around already and it’s not clear what changes this investor could push for to improve outcomes that the carrier isn’t already undertaking. Indeed, some of the changes under consideration – such as more ‘basic’-style fare products and more premium legroom offerings – could alienate customers.

Fundamentally Southwest’s issues come down to,

  • rising costs
  • not growing enough at low marginal cost to spread out those costs
  • or growing revenue enough

Southwest only flies Boeing 737s. They haven’t squeezed more seats into those 737s, to get more seats without increased cost while (hopefully) not losing revenue along the way and they haven’t added larger planes (which would come with fleet complexity and cost but on some routes could allow them to fill more seats at lower cost per seat).

Southwest doesn’t offer premium products. They have some more expensive fares, that come with benefits like earlier boarding, free wifi and a cocktail. But they don’t offer a premium experience that people will pay more for, and have been losing out on the recent premium leisure trend.

They haven’t taken steps to hold cost per seat down, or drive premium revenue, as wages and other costs have risen. They pay like a full legacy airline, more or less (their recent flight attendants deal is top of the industry), but don’t generate revenue through long haul international business class ticket sales or even premium economy long haul or domestic first class. They aren’t a low cost carrier anymore.

New Southwest Airlines ‘One-Ply’ Seats

The airline has, however, managed to maintain a truly unique culture even as they’ve grown and matured. Their people still have fun, seem to enjoy their jobs, and that usually makes them a pleasure to fly – even as in many ways their operation has deferred technology investment for decades.

JetBlue is contending with activist investor Carl Icahn. Elliott probably doesn’t bring new ideas. It’s possible they believe that Southwest won’t go far enough in the changes it is considering, that management will be too recalcitrant, and either pushing management’s willingness to make change or changing management could deliver results. That’s highly speculative.

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Nonetheless, if you just believe in Southwest and their opportunity to expand beyond mature domestic markets they still have upside. If the macro environment holds, and the premium trend abates, circumstances along could drive mean reversion.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. If I had to guess, their plan is to implement the same stupid Basic Economy, seat fees, checked bag fees, etc.

  2. @Mike – they need to make changes. Assigned seats (and likely some premium extra legroom seats) are a necessity. The gaming of saving seats and abuse of preboarding has to end. While SW has loyal passengers I would argue they turn off more profitable business travelers due to these issue.

    If they want to continue “free bags” go for it. It is giving up a revenue source but mainly appeals to low volume travelers looking for the cheapest ticket. Any little travelers, one in first or certain coach ticket classes or those that even have the right credit card don’t pay bag fees on DL/AA/UA. I understand if SW is the only non-stop option in certain markets but will never understand why people otherwise choose this airline with their current policies.

  3. If Southwest follows the crowd with charges for checked bags and assigned seats I am almost certain that they will fail because they will have a lot of competitors.

  4. It’s a no brainer for SW to add a couple of additional rows of seats to their 737’s. Firstly, they don’t even leverage the extra leg room they offer today. Secondly, the majority of their fliers are seeking low prices. Adding seats is a definite method of keeping prices lower.

  5. Agreed with @AC that the most significant change required by far is to deal with the current Open Seating issue. One obvious choice is to migrate to Assigned Seating. Another obvious choice is to stay with Open Seating but with two major changes: 1) Force “Handicap” passengers into a less desirable seating section (thus eliminating all of the faking); and 2) Outlaw “Seat Saving” (with draconian penalties for those that still attempt it). There may be a third option but the bottom line is the same, they have to deal with it in order to attract new passengers.

  6. SWA has a niche, but anyone who flies them knows they have the LCC clientele as well as business folks who either have no choice, are recreational travelers or just don’t know any better.

    Why don’t folks fly them. My husband had to go CMH to MCO. AA delayed his flight by 10 hours upon waking up for his flight and had to be there and AA, Delta, UA had no options. Only option was SWA. So first, good on them for having availability.

    The issue isn’t his ticket was $700 one way for a 40 min flight. At least they had seats. The issue was he checked in just a few hours before departure so was C30 something on the list. Luckily he got an aisle clear in the back to ORD but on his flight to MCO got stuck in a middle seat.

    That’s the problem with SWA. It’s not business friendly. He probably paid more than anyone else. I as through no fault of his own but yet had to deal with countless miracles of Jesus and be stuck in a middle seat. It’s also why I have only ever flown them once. It’s not worth the headache.

  7. The fares aren’t that low. Throw in the seating bs and that’s why i never fly them.

  8. Trading on the NYSE just opened and LUV is up 7% compared to slightly down for most indices and other airlines.

    LUV has enough assets and has been well-run for long enough that it was set to turn around one way or another. Their problem at it root is Boeing delivery delays and the delayed certification of the MAX7.
    The solution is to increase revenues in other areas faster than they would get from growth if they could get new planes.

    They already have a plan to turn things around – although they have moved slow to figure out alternatives to Boeing’s delays and implement it – or an activist investor would jump in and try to make money.

    This isn’t much different from what is happening with JBLU but it does say that there is deep value in airlines and it will come out one way or another.

  9. My daddy LUV’s to copy and paste his posts across multiple travel blog websites…

  10. I think is was the mid-80’s, hostile-takeovers were all the rage, somebody unexpected, doesn’t seem probable, I recall Korean Air, showed up in Herb Kelleher’s office, told him they were planning to buy enough SW stock to take it over. Herb laughed about it later, typical Herb, “I threw a stem-winding fit, hollering, pounding my desk, “I built this airline, don’t you think I know how to tear it apart before you get it, so it’s not worth a damn thing … and I’ll start the day you get enough stock to have to report to SEC!” Swore, man literally ran from his office, down the hall … “Maybe he’ll spread the word to anybody else with big ideas!”

  11. hey Jr.
    you highlight once again that you are really jealous that someone else can carry the conversation about significant issues in the industry while you hide in the bushes firing potshots.

    And, no, the content is not identical.

  12. Some people want SW to implement assigned seating, others don’t. Why not split the difference ? Let Business Select customers pick seats, they board first. Then the pre boarders/scammers, then non BS customers can do the usual cattle call.

  13. first,
    if you are incapable of seeing the differences in what I wrote on the two sites, then you need either your brain or your eyes examined.
    I like Gary and Ben’s sites for different reasons and try to contribute fairly to each. The fact that you and others read both sites proves there is a fair amount of cross-readership.

    and, finally, no one is in doubt that you are simply a low-IQ interloper that really isn’t interested in contributing to any aviation discussion – at least under your real name.
    All you are interested in doing is shutting down the conversation by anyone that dares say anything negative about your dear airline or speak the truth about the industry at all.

    If you had any IQ, you would simply ignore comments that you don’t like but you only create a bigger persona for someone that you don’t want to even see.
    Get a life and let other people live theirs.
    If you don’t like what other people do, have the brains to not draw attention to them thinking it will make them do what you want.
    In reality, anyone w/ a few months of real life experience would know the opposite usually results.

    The activist investor in LUV is a big deal. Many of us want to see LUV turned around.
    I trust Gary will cover it all as aggressively as he does AA’s labor situation.

  14. @Tim Dunn –

    You seem to have a high opinion of yourself. The problem is, your abrasiveness makes you so unlikeable that even if you managed to make a good point, everybody has already tuned you out. I enjoy most of Gary’s posts, but dread the sight of a comment with your name on it.

  15. you simply are incapable of discussing the subject.
    You and you alone – regardless of how many user names you and your friends use – can’t stand that someone else knows what they are talking about and so you call the truth “abrasive”

    All that is abrasive is your childish inability to accept a world where others get to speak regardless of whether you like what they say or not.

    For someone that claims you dread seeing what I write, you are incredibly dense in replying and commenting about me knowing full well that you will elicit a response.

    Walk away and get a life.

    You have failed.

    I am going nowhere.

  16. My take on what SW should do is as sought out as my opinions on what the local pro team should do. But, anyway, here’s my tuppence.
    Look at Qantas and Virgin Australia. QF has -1 and VA has +1 total seats in the 738 relative to SW. QF has 3 rows of 2-2 first and 30″ in Y, with no Y+. VA has 2 rows of 2-2, 3 rows of Y+(34′) and 31″ in Y. Both have two exit rows of 37/38″ (a more expensive pay-to-reserve Y for QF and additional Y+ for VA). Nobody flying SW is going to miss the 1-2″ (oh, they say they will but so many won’t front the $ for the extra).
    So, SW adopt assigned seating. You can get 2 bags (maybe just one) and an assigned Y seat you select from the back half of the plane for the same price you pay for SW’s current lowest fare. Allow them to pay extra for a better seat, all the way up to a real F. You can fly the same number of people, get the same $ from most and a bit more from some. No sest saving, no seat-assignment-based reason to fake wheelchair needs.
    So, do essentially what QF and/or VA are doing in their markets. Most of their routes are short, just like SW. Unlike SW, I happily fly QF and VA in Y/Y+. I fly F on US carriers, but given the typical distance, the bag inclusion, and the much higher F to Y price ratio in Australia, I’m exclusively in Y or Y+ there (unless it is an included connection my J flight to/from the U.S.

  17. Hee hee…my daddy LUVs to be the center of attention. You all know you read these travel blogs to see what he’ll post next!

  18. you definitely have none of my genes….

    the only one that wants to be the center of attention is you.

    You aren’t smart enough to figure out that I just might post LESS if you bothered to keep your off-topic comments to yourself.

    Do you think you could rub 2 neurons together and interact w/ the subject as Dave W above you and others have done?

  19. SouthWest needs to deal with the wheelchair, seat saving, and “family” boarding abuse. That will remove a lot chaff from the system. All three of those result in a direct or future loss of revenue.

    Once they solve those issues, then you can look into assigned seating.

  20. John,
    WN is dealing w/ those issues; they simply planned to deal w/ them in the fall. Elliott’s move might force them to announce something earlier.

    When you assign seats or at least block certain parts of the aircraft from being free for alls for pre-boarders, the equity that was part of the way WN will be replaced by “everyone gets what they pay for”

    Alot of people never liked that you have to board exactly when WN says you have to board or lose the “right” to the best seat you could get. WN’s increased reliance on connecting traffic increases the chances you won’t get what you paid for.

    The WN point to point network on smaller 737s worked well w/ open seating; larger aircraft, connections, and abusive practices by some passengers make it obsolete.

    The rest falls into place after they fix open seating.

  21. WN leaves too much money on the table. Charging for checked bags and providing some “premium” seating as well as adding some seats could go a long way in helping their bottom line. I would bet they would gain more from travelers (especially business) who avoid them now for various reasons, than they would lose from the ones who would complain about the loss of free checked bags and the open seating.

  22. I personally love Southwest when it fits my schedule and destinations with hubs that are close to destinations for fast turns and the opportunity to catch nonstop flights to secondary cities. Southwest has some of the most unique pairings in the early and late evenings. Buying business select last minute is a way to get seating you want if available. Their refund process is simplistic in the industry. Middle seats assignment can happen on any airline last minute. I have bought many last minute tickets and sat in the middle on Delta, United, and Southwest.

    Yes there are miracle walkers, fly through passengers, and family boarding that can take up half of their planes and leaving not much for the rest of us. Yes, I have met some very entitled SWA flight attendants. Somehow their bins are almost always full on a full flight. Southwest doesn’t handle weather good and doesn’t have enough turn time. Southwest is a good weather airline so I book accordingly. I guess that every airline has its issues but I think that I’m lucky that I get to fly today and operations are reasonable.

  23. Free checked bags helps the plane load and unload faster. With more bags in the hold and fewer being carried on, delays caused by passengers horsing their bags into the overhead bins to save on checked baggage fees are reduced. It was stupid to charge for checked bags in the first place; the airlines just shot themselves in the foot. Charging for overhead bin space would have been a far better idea.

    I agree that Southwest should go to assigned seating and should create a small first class section, with those passengers actually getting more to eat than pretzels. For economy, Southwest seat pitch should stay the same, and the fare passengers pay should include seat selection of any available seat.

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