The basic problem with Southwest Airlines is that they’ve outgrown their model. They were the most consistently profitable airline for decades – racking up 47 straight years of profits, even through 9/11 and the Great Recession – with a simple formula. They had low costs, a single fleet type, and simple customer-friendly policies.
Now, however, Southwest:
- Is no longer a low cost carrier. They don’t have the Gary Kelly fuel hedges anymore and have expensive contracts with pilots, flight attendants and other work groups. Headquarters staff has grown.
- They lack long haul flying and partnerships. Southwest takes you to the biggest domestic markets but can’t sell tickets to Europe or other worldwide destinations that customers want to fly. And they don’t benefit from the tickets foreign airlines are selling to their customers. A passenger from Asia can’t land in Los Angeles and transfer on the same ticket to a Southwest flight, or from Europe in New York. That’s a lot of business lost.
- They can’t serve small markets bringing connecting feed to their larger planes. With nothing smaller than a Boeing 737 they can’t serve the markets that other airlines reach with regional jets. Those passengers then can’t flow through the rest of Southwest’s route network.
- They don’t offer premium products. Customers have increasingly wanted more room and other conveniences, and Southwest hasn’t had anything to offer those passengers. This also cashes out in fewer high income customers than legacy airline peers.
- Customers don’t know about their flights. Southwest largely sells tickets through their own channels only. They don’t sell to leisure travelers through online travel agencies or distribute their fares through Sabre and similar systems. That also means customers don’t directly compare prices, which is great since Southwest generally doesn’t offer the lowest fares… but they also don’t sell restrictive basic economy tickets and they include free checked bags with every fare. However this means that they sell tickets largely to customers living in their major cities who know about the option, but have far fewer customers at their spokes.
It was a great model until it wasn’t anymore. They just can’t keep growing without changes, and won’t return to their historic lower costs. They need to abandon simplicity for growth, but that complexity will mean greater costs too. And that means Southwest is unlikely to be Southwest again, though they still have advantages – primarily that they are still a differentiated product in the market, and with employees who largely don’t hate their jobs and that difference shows against American Airlines and United.
Covid accelerated changes in the market. Activist investor Elliott Management complains that Southwest management has been slow to adapt, and that’s true. But they don’t offer solutions beyond vague notions that Southwest fails to ape policies and practices of even less successful airlines (American Airlines, JetBlue). They don’t have answers and shouldn’t be put in charge. But they have accelerated change at Southwest.
Southwest is presenting a new plan at Investor Day this morning.
- Southwest wants to increase aircraft utilization. Part of that is redeye flying, which will help expand the reach of their Hawaii service since Hawaii flights to the mainland need to operate overnight to connect to most markets in the middle of the country eastward. They’ll operate other redeyes, which will be of marginal value, but they already have the planes so this can make strategic sense.
It’s a little bit insane that it is going to take three years to have all of their redeyes running?
They also think they can reduce the time planes are on the ground, but assigned seats will work against that (the current model has passengers lining up in advance to board and getting seated quickly). If they started charging for bags, there would be more carry-ons, slowing boarding further. That’s one reason they aren’t going to charge for bags even thought they don’t say so. They’re already the quickest for turning around planes, it seems unlikely that this will get even lower as boarding times presumably get longer.
Boarding is still going to look the same, but of course there will be no more reason to line up in your boarding order since you get your assigned seat even if you board just prior to doors close.
- Southwest is cutting unprofitable flying. They have already slashed Atlanta, which had already retrenched since their acquisition of Atlanta-based AirTran. This is a gift to Delta.
It’s tough to cut to profitability, they shouldn’t fly unprofitable routes but
- need to do the accounting correctly, since pulling back in markets will hurt other flights and even brand awareness in those markets, especially important to Southwest which needs to drive customers to its website to learn about its schedules, and because airlines often fail to account for credit card revenue that comes from a market appropriately [American learned this lesson about New York, and United after cutting domestic flying under CEO Jeff Smisek, and
- need to replace it with other flying which is tough for Southwest without a more diversifie fleet.
They’ll keep flights to slot-restricted New York LaGuardia and Washington National. Much of their operations at congested Northeast airports gained from AirTran have previously been pulled back. They will re-align money-losing Hawaii inter-island flying and, it seems, Oakland. California non-stop business flights haven’t recovered from pandemic drops.
- Adding extra legroom seats. Southwest is expected to add legroom to about one-third of seats. They can’t do this without assigned seating. And assigned seating changes their boarding process. They think selling seat assignments will earn more than Early Bird and Early Boarding fees. They get extra legroom by squeezing legroom in the rest of the cabin. Boeing 737-800s and MAX 8s won’t even lose any seats.
They’ll still offer one more inch of distance between rows than American, Delta or United’s standard economy, however.
Meanwhile, though they will retrofit planes quickly, assigned seating won’t start until 2026. That means there’ll be a period of time where customers can get free extra legroom seats with an early boarding number under the current system. So for awhile flying Southwest for one-third of customers will be great! Still, the actual start of assigned seating is too far away.
A-List and A-List Preferred elite customers will gain access to free seat assignments with extra legroom seats available to A-List Preferred at booking, and to A-List 48 hours prior to departure.
- Bags will continue to fly free. Southwest thinks they’d generate $1 billion to $1.5 billion per year charging for bags, and lose $1.8 billion in ticket revenue. 97% of their customers are aware of free checked bags on Southwest. I have to wonder, though, whether adding themselves to online travel agency sites would partially offset this revenue loss (and the biggest reason not to is that comparing fares isn’t like-to-like, since Southwest… includes bags in its fares) and whether they’re accounting for the 7.5% domestic excise tax savings from moving checked bag costs out of the fare and into fees… in other words, whether they’re cherry-picking their numbers.
- Will begin partnering with other airlines Icelandair out of Baltimore will be first starting next year. With this partnership Rapid Rewards members will be able to redeem points for travel to Europe which is also the beginning of an improved incentive for co-brand credit card spend, the way that the introduction of Hawaii service was as well. A second partner will come in 2025 as well.
Despite companion pass driving card spend today, the lack of destinations and partnerships means that customers still spend less today on Southwest credit cards. Route cutbacks won’t help here (they will capture less spend in the Atlanta market!) but partnerships can help.
These are the beginnings of mostly smart changes, but don’t go far enough or fast enough. In the end, though, they’re likely directionally correct given the constraints the airline fares. There’s no going back to historic profitability metrics and growth potential under the old model. That means their future is different; closer to a legacy airline. That’s largely inevitable both in terms of product and financial performance, and thus stock performance.
To be clear, this is probably an improvement and the market’s initial reaction is positive – it just isn’t likely to return them to historic performance. (And the stock pop may come from the bump in guidance Southwest offered alongside their new plan, though better revenue is attributed to macro issues and to the July Crowdstrike meltdown which Southwest averted – and which led to bookings on them rather than struggling peers.)
Interestingly, Southwest’s pullback on intra-Hawaii flying is, in large measure, a consequence of the federal government’s efforts to ensure intra-Hawaii service. They demanded that Alaska Airlines maintain Hawaiian’s service as a condition of the merger. Since Alaska can’t reduce capacity, the market will remain bloody, and Southwest needs to pull back on its service. Oops.
If DOT’s new rule on displaying fees with fares at first instance is sustained in the courts (it is currently enjoined by the 5th Circuit), that’ll help Southwest and allow it to effectively sell to more customers through global distribution systems – they can appear on Expedia without a disadvantage, because their free bags-inclusive fares would be shown against fares from American, Delta and others including their bag prices.
“Bags will continue to fly free.”
Disappointing. Southwest should not only charge for checked bags, but charge even more for carry-ons. And dramatically reduce per-bag weight limits from 50 lb to no more than 33 lb.
Encouraging passengers to pack light is long overdue.
Wheelchair attendants should rejoice! Game over, freeloaders!
@Denver … No charge for miniskirt girls .
Excellent article, Gary.
It appears that Southwest is finally admitting its business model is outdated. Not sure why the executives insist on the bags-fly-free nonsense. Increases labor costs with no corresponding increase in premium RASM.
On the one hand free checked bags speeds up boarding. On the other hand it makes their fares less attractive at the margin. All passengers essentially pay for the “free” checked bags as a part of the fare. I never check, so why do I want to pay? I question whether there would be a loss in fare revenue anything like the numbers the show.
I used to fly SWA all the time for business in the Midwest, but once my travel went Transcom and even international I switch to TWA (still miss them) and NWA/DL then AA (moved hub cities). Since I have loyalty, bag fees, club access, upgrades huge plus including on partner airlines like BA and IB.
The last time I took SWA was December of last year. . .they were more expensive, were late and the leg room etc. . .sucked compared to AA. And not to be a snob, but was worse then taking a light rail train from PHX to the burbs. I only took them because it was a medical emergency and the AA flights were full :(.
As a last resort, fine, but last last last resort. AA’s got my business and DL a back up for a long time to come.
Very nice analysis.
Unfortunately flying isn’t what it used to be. The ULCC has brought bottom of the barrel people to the skies that do things like fake disabilities to get first crack of seats then do even more disgusting things to seat hog. Now their game is up.
@Denver – show me an entitled POS that’s never had a bag lost, or doesn’t travel with expensive equipment that won’t be covered/insured properly as checked baggage?
(That’s you, by the way. FOESAD).
While only one factor in SWA’s troubles, it’s a significant one..their failure in Hawaii. Inter island was a disaster and was obviously a failed business model sparking many who knew the operation “what were they thinking?”….. their approach of tying up an expensive 737 max for a $39 dollar inter island fare was ridiculous and as currently operated they can’t be profitable either.
The red eyes trying to tap in to East Coast traffic may have limited appeal but if Alaska augments the success HA has had JFK to HNL and also to a limited amount BOS and AUS, there may not be much room for SWA in the market east of the west coast. People mostly would rather go to Hawaii non stop on Hawaiian rather than multiple stops including a red eye to Hawaii on SWA.
@JCW – wheelchair attendants’ compensation includes tips. Less wheelchairs, less tips. They just took a pay cut.
this is well done analysis.
Decent start but I expect Elliott to be successful in obtaining some board positions and firing a lot of senior management. The changes themselves aren’t bad but need to be done much more quickly. Not having assigned seats until 2026 is ridiculous.
@mikey b – you assume most tip them. I’ve seen way too many that don’t either because they are cheap or don’t understand that is expected.
Assigning seats will happen in the second half of 2025 from the email I got from Bob Jordan.
Great and really comprehensive write up. Thank you.
Luggage – a rule should exist that all airlines must allow for one checked bag. One checked bag is sufficient. I don’t understand why people do “2” even when I travel abroad I only check in 1 and 1 carryon. That’s sufficient. I dislike people carrying heavy bags they cannot lift above their own head to place in the overhead bins. I don’t blame flight attendants for not wanting to assist with a 50 lb bag! I refuse to help others with their heavy bag. If it’s an elderly person I will do it. When my elderly mother flies I ensure her bag is checked in. It takes SOOO much time for people to jam their heavy luggage onto overhead bins. I always fear someone’s head is going to get significantly hurt because of the heavy luggage (I will move fearing they will hit me). This is a lawsuit I will welcome bc I truly believe that all airlines should allow for 1 check piece of luggage – that’s fair – account for it in the price if you want but deal with this nightmare. it is not fair to me that I get to worry about the luggage hitting me bc people don’t want to pay $40 to check in luggage. The airlines exposes ALL flyers to being hurt by others because it wants to save money. I appreciate that SW allows for check bags and that’s why we are able to hurry up, get seated and fly out. Legacy airlines with assigned seating and carry on take way longer to get into the air. People take longer to get into their seats, tug/pull to get their bags loaded… I fear this nightmare with SW.
@AC, scheduled to happen last half of 2025 not 2026. Don’t know where you got that. However, changes to technology must take place first along with training.
@MikeyB- I doubt the average WN clientele, who games the system, is that big of a tipper anyway.
very good summary, Gary.
This will all take a lot of time.
The financial strategies are just as important – covered separately
Excellent summary.
Traditional travel agencies have had access to WN flights for a couple of years! Maybe online agencies do not, but then you can’t talk to an online agency. Nice to have a human involved to watch over my travels. Without your Professional Travel Agent, you’re on your own! No standing in long lines in case of travel issues, just call your agent for rebooking!
No more early boarding for family’s with kids so grandma grandpa aunts uncle’s cousin sisters will have to board in there correct zones!
Activist investors ruin another good, unique thing to drive market homogeneity