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.

1. 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.

2. 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.