Southwest Airlines Nightmare: Plummeting Revenue And CEO’s Job at Risk, Activist Investor Plans Takeover

Two weeks ago Southwest announced dismal earnings projections, saying that they’d miss their previous guidance for the second quarter by a lot.

Their previous ‘worst case scenario’ was projecting a 3.5% year-over-year drop in revenue per available seat mile. But things are worse than they’d previously suggested, now saying say down 4% – 4.5%.

The airline CEO’s job is on the line. Elliott Capital Management has taken a nearly $2 billion stake in the airline. To keep them from gaining control Southwest adopted a poison pill that dilutes any acquirer whose stake hits 12.5% without the board’s approval.

  • Elliott Capital says they don’t plan to buy the airline. The poison pill might stop that but they have something different in mind.

  • They just want to control it and change it. And they say they’re planning a proxy fight to get shareholders to vote for their board candidates.

The activist investor makes obvious claims – that the airline is underperforming financially – and concludes that they need a change in management. That isn’t wrong. In fact, Southwest acknowledged this vociferously on their first quarter earnings call before this all began. Southwest is planning to announce major changes at their investor day in a couple of months, that look to include things like assigned seats, premium extra legroom seats, and basic economy:

  • Love Cabin would be extra legroom seats at the front of the aircraft. This will entail taking planes out of service to accommodate reconfiguring cabins. It’s possible that adding extra legroom seats wouldn’t reduce the number of seats per aircraft. Currently Southwest offers more legroom than standard economy compared to Delta, American or United. They do not advertise their legroom advantage versus competitors. Regular coach seating could get tighter.

  • Blocked middle seats? Southwest could offer blocked middle seats for sale in Love Cabin, along the lines of Frontier, where the airline sells a seat block to both the aisle and middle seat passenger as an option. That gives them not just extra legroom but extra width as well. And the opportunity to sell that middle seat block twice, combined with Southwest’s lower than industry average load factors, could mean a boost to revenue compared to trying to sell that seat. It is not clear how firm this is in the airline’s plan.

  • Basic economy I’ve heard several reports that the airline is working on a replacement for their cheapest Wanna Get Away fare. Presumably these passengers would board last and have last choice of seats. They might get access to seat assignments (if assigned seats are offered throughout the cabin, not just the Love Cabin) or boarding order only an hour prior to departure. Two free checked bags are so baked into Southwest’s value proposition that this could remain, although I’ve heard it both ways. There could be change restrictions introduced.

In many ways these are already along the lines of things that Elliott Capital has suggested. They’re on firm ground suggesting that Southwest hasn’t had the routes people have wanted to fly (not even airline partnerships to sell Europe, for instance) or the (premium) products people have wanted to buy.

However Elliott is on shaky ground in terms of having an actual plan to fix things.

  • Change at the top. They want a new CEO and they want their board members in place.

  • Become more like legacy airlines following a model that has failed for JetBlue over the past decade, giving up its competitive differentiation and turning into a money-loser with plummeting stock price. That was all in Elliott Capital’s original deck, though less emphasized now.

They’re now talking less about particulars than they were a month ago, punting solutions to ‘whatever the new board and CEO figure out’.

Following a Board refresh and the appointment of a highly qualified and credible new CEO, Southwest would be well positioned to develop and execute a new strategy to restore the airline to industry-leading performance. This comprehensive business review should be led by a new Board-level Business Review Committee. We believe that fresh perspectives, operational excellence and an openness to evaluating all options are imperative to Southwest’s future success.

If there was doubt change at the airline was necessary, there’d be a role for Elliott Capital. If Elliott Capital had a vision for how to fix things, there might be as well. Here they just make the case that change is necessary, and ask for their people to be put in charge saying they’ll figure out what the plan is later.

So when they say they’ll “move expeditiously to give shareholders a direct say on the necessary leadership changes” they’re planning a proxy fight, putting their board members in place. But towards what end, besides firing current board members they replace as well as the CEO? The problem here is the lack of a solution!

Southwest’s competitive advantage is its culture, customer value, and simplicity of product. They can take steps to improve revenue, selling extra legroom and blocked middle seats. They can improve aircraft utilization and eke out low cost revenue with redeyes. They haven’t moved fast enough to do these things, and more outside leadership might help. But turning Southwest Airlines into a copycat of other airlines, who are already viewed as less valuable in the market based on earnings multiples, isn’t a recipe for airline or shareholder success.

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. you mean Elliott came along and suggested things that LUV said it was considering – and you yourself wrote about months ago.

    Elliott isn’t interested in anything more than stomping its feet and getting its way – at the expense of everyone else and leaving LUV worse off.

    BoJo and Gary’s only mistake was believing Boeing when they repeatedly said “we’ll get the MAX figured out in 6 more months; just be patient” -which has cost WN scores of new planes and growth opportunity. Elliott can’t fix and isn’t trying to fix Boeing but that is the problem.

    Rooting for Elliott to walk away empty handed and red-faced.

  2. @TimDunn … If the CEO cannot handle Southwest , I volunteer TimDunn to turn them around .

  3. For all you people wanting the old SW and underestimating Elliott you are in for a surprise (shock). Elliott wants 2 things – a say in manager and a profitable return on their investment. They have played the long game before to get it (hence one of the largest and most successful firm in finance). BTW do a little research. As a rule Elliott isn’t one to come in, financially engineer things and load the company w debt to get a profit. Yes they want cost savings and changes in how things are run but typically keep a sizable stake in companies in which they make investments and are usually seen as a good partner. SW is so hung up on the old way of doing things, which frankly isn’t working any more regardless of what the loyalists on here want to believe, they are putting up barriers and it won’t end well for many SW executives.

    BTW very smart move by Elliott to wage a proxy battle. They don’t need to increase the stake to risk dilution and have already gotten several major investors on their side. I’m willing to bet they will have 40+% of the votes locked up before the actual proxies go out. Also their message is well received by investors that see poor return under current management

  4. If they added one extra row of seats (6 seats) to each aircraft, what would that do to their bottom line? Quite a bit, I would think.

  5. In one of their last emails, Frontier had a comparison table between their offerings and …. Southwest! So clearly Frontier sees themselves competing against Southwest and if indeed Southwest introduces these changes, its value proposition will be quite similar to Frontier. Which has lower prices.

  6. AC
    the question is not whether WN has underperformed but the reason for its underperformance.

    Everyone wants to believe that WN execs are the problem w/o admitting how badly WN has been hurt by Boeing’s delays in certifying the MAX 7 and its delivery delays even of the MAX 8.

    WN is running the wrong size aircraft with suboptimal schedules and spending on maintenance of old aircraft it wants to retire.

    Multiple other airlines are hurting financially because of Boeing but Elliott can’t fix them.

    good for WN for fighting back.

    They had a plan to overcome Boeing’s problems long before Elliott showed up and will execute that plan.

    And Boeing is addressing its issues and will get the MAX 7 and then the 10 certified.

    Making major strategic changes in the middle of a crisis of someone else’s making is not what WN needs to do – and they won’t.

  7. WN can’t grow much more. It limits itself on the model it runs, antiquated IT, and a business model that has long become stale and no longer innovative. WN is a merger candidate down the road, and so is B6, for different reasons.


    One or more will happen in the next 5-10 years.

  8. Elliott is obviously not going to give away their solution prior to gaining control or competitors will react and others could try and appropriate their ideas.

    This is always the case in a corporate acquisition.

  9. As a Flight Attendant for another major carrier going through similar struggles, the old, “We know what we’re doing just give us more time!” doesn’t fly anymore! Innovate or die!

  10. Tim Dunn is 100% correct on this one. Southwest married their thesis, so to speak (Only BA 737s), and will divorce their money due to lack of fleet diversification.

    Premium Delta has largely sidestepped this, but they could be at the mercy of Airbus with their widebody strategy when the pendulum swings.

    Southwest does need to reform themselves- what worked in 1970’s Texas will not profitably work now imo.

  11. Larry,
    thankfully, the DOJ will not listen to you, not in this administration and not in any administration.

    Eliminating competitors including to fix one carrier’s strategic failures is not going to be approved.

    And allowing high cost (AA, DL, UA) to acquire a lower cost airline will mean many of the latter’s routes simply won’t work and will get dropped.

  12. The issues at Southwest are far from one-dimensional Boeing problems. Yes, one example, but the WN culture and leadership’s failure to adapt to nearly any changing circumstance hurts productivity and drives higher costs throughout the organization.

  13. @Tim Dunn – I hope you’re right. The DOJ had a chance to draw a line in the sand on AA/US and Holder caved. Consumers are still paying the price. We really can’t tolerate any more domestic consolidation. For that matter, the U.S. should allow foreign carriers to compete in the domestic market under a permitting system, capped at a minority level of overall market share. It can be accomplished in a manner that would not put national security at any meaningful risk.

    As for WN, if they are going to assign seats, then they may as well look towards a bona fide domestic F product to coincide with the renewal of their FA contract in a few years. This would draw in a lot of premium business revenue that will otherwise never materialize.

  14. Hey Southwest! Boeing problems aside. Changes are needed to increase revenue. How about starting with something simple that EVERY other airline does. Finally start charging for the second bag! We don’t need two free. $25 per bag to start raising some easy revenue quickly..

  15. Southwest is the Exhibit A of why you should never risk your entire operation with a single source supplier, especially one like Boeing. It’s an order boomerang that will cost Southwest billions for years to come.

    They should have split the last order for the A321s just as an attention-getter and re-risk it’s order book, as it’s going to take Boeing a decade before a 200+ seat 737 replacement is flying.

  16. I’m thinking charging for a carry-on but keeping the first bag free might be an interesting differentiator. First, nobody does that. Second, carry-on is a convenience that some people will pay for but being able to check a bag for free will alleviate the sting. Then with fewer carry-ons on planes, boarding and deboarding will be much faster, improving operations.

  17. As a loyal SWA customer and companion pass holder for almost two decades, I don’t want changes that makes them like the legacy airlines. If I did, I would fly them. I despise being nickeled and dimed to death and can’t stand class based assigned seating! SWA needs to charge competitive prices and keep everything the same. They do need to add more international flights and/or partners; globally. Declined revenue is the result of the many issues at Boeing, resulting in delayed deliveries. If Elliot Capital wants to increase revenue at SWA, they should take a stake in BA and implement the necessary changes so they deliver their backlog of planes to SWA safely on time. Unfortunately, greed at Elliot Capital will likely result in SWA going bankrupt and being acquired by the legacy’s when they implement their greedy changes and loyal customers like me start shopping other airlines. This is likely Elliot Capital’s long term plan to force airline consolidation, resulting in less choice for consumers, and higher margins/increased profits with the legacy’s long term???

  18. When Southwest bought AirTran, it got a foothold at ATL. Without realizing it, WN moved from Point to Point to Hub & Spoke and shifted to legacy carrier status. If in doubt, look at the WN crowd at ATL during the day; knocking fellow passengers over to make connections. The same is happening at Denver & Vegas.
    I’m old enough to remember the Hot Pants and Peanut fares. However, times have changed! Flying on WN has become a royal pain in the arse with “reserved” seats and the “Jesus Jetway” crowd. Yet, WN is still using a revenue software package dating back to the 80’s. WN is leaving considerable money on the table, stockholders are getting antsy, and the BOD has an appointment with the guillotine.
    Time for those in the C-Suite to wake up and smell the money!!

  19. My concern with the premium/F cabin overhaul is that its a cash cow in good times & money pit in bad. I’ve been in the biz long enough to know that people (or companies) are willing to fork out $$$ in a growth cycle but that stops when growth flatlines. Those 12 or 16 seats are filled with upgrades and nonrevs. In no growth or recessionary times, when people are chasing value, those seats would be handy on the revenue front.

  20. Basic Economy with reduced benefits on SW would be a non starter for me unless they reduce the price. Wanna get away fares are now rarely cheaper than standard coach on competitors. And competitors don’t require cattle car boarding. And if SW offers lower prices that cuts their revenue

  21. Cranky did a nice piece on the subject a week or two back but all this posing by Elliott looks an awful lot like corporate raiding that will mortgage the future in exchange for a fat short term payout. What could possibly go wrong with that?

  22. @Christian, totally agree. Elliott is most definitely a corporate raider and seeks to destroy it. Tim Dunn is correct also, major problems began with the whole Boeing mess and will continue until Boeing gets its business in order. Maybe Elliott should go after Boeing and straighten them out which would help a number of airlines. Making Southwest Airlines just another cookie cutter airline is not the answer long term. I have been almost exclusively flying them over 30 years and do not want to see the snake, Elliott, get their way. It was difficult enough to overcome surly employees when Air Tran was purchased. Southwest most certainly does not ever want to be compared to Frontier or Spirit but if Elliott prevails, that will be what happens. I am hoping to see Elliott go straight to ….! Their proposals are the last thing Southwest needs.

  23. Ive been flying SW only since the 90s. If SW becomes like the other airlines then I’ll just fly them.

  24. Please Help Save Our LUV Airline!!! I have worked for SWA in different positions for over 30 yrs. We have gone through some hard times together from 911 to Covid and everything in between. You all are the best!! Thank you for your business, your encouragement and your forgiveness. We also have some very special, resilient, and devoted employees who take pride in what they do. Please don’t let us become a thing of the past. We love you and want to keep serving you all. We are a family here at SWA. We appreciate all of you who have stuck it out with us through the years. Thank you so much. Though some change is needed and may be coming, we will do whatever it takes to fight for what makes us great. We want to be here and still be loved for another 53 years. We want to happily say we are a retired SWA employee one day and that our kids and grandkids are still there. Please help us grow but keep what makes us stand out from the others. We love that we are unique and want to preserve what makes SWA special to you. You’re Our Heart and Soul. We would’ve never have made it this far without you!
    Luv, a grateful employee

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