Southwest Airlines is a love-it-or-hate-it airline. It offers a barebones style of service but also provides free things that no other airline in the U.S. does. However, the future of Southwest is in jeopardy as an activist investor attempts to change the very character of the airline. Why? For short-term profits, of course.
As I’m sure you’ve heard from multiple news outlets by now, activist investor Elliott Management has acquired 10% of Southwest Airlines’ outstanding shares. That makes them the single largest shareholder of the airline, which gives them quite a bit of leverage. And if you guessed that they obtained that leverage to try to force some changes at the airline, you’d be right. Unfortunately, Elliott doesn’t seem to understand what makes Southwest, well, Southwest, which is why I say the future of Southwest is in jeopardy.
The Future of Southwest is in Jeopardy
Elliott has a goal of getting Southwest’s share price quickly up to $49, which is a little more than double what it is today. That’s a massive change in value, which isn’t something that’s possible without equally huge changes. Naturally, such changes aren’t in the best interest of the airline (or any business); they’re done to benefit shareholders. Of course, this is why the future of Southwest is in jeopardy.
As reported by Cranky Flier, Elliott’s plan to achieve their share price goal is to make Southwest like every other airline in the U.S. Specifially, Elliott complains that Southwest’s management has historically ruled out industry-standard initiatives, such as assigned seating, premium products, basic economy, and checked bag fees.
Yes, all other airlines in the U.S. have these four basic things. And sure, assigned seating might be a welcome change at Southwest, but is everything else? Nope. You see, free checked bags are one of Southwest’s greatest differentiators, especially since they don’t have any premium products. Of course, Basic Economy takes the bag fee component and ratchets it by not only forcing passengers to pay for their checked bag but also putting them in the last boarding group, not allowing seat assignments in advance, barring certain frequent flyer benefits, and (sometimes) charging for fee carry-on bags.
It doesn’t take an airline expert to understand why making Southwest like every other airline is a bad idea. Southwest’s loyalists fly with the airline because it isn’t like the others. So, implementing Basic Economy and/or checked bag fees would alienate these passengers and would likely worsen their financial position.
What I Think Southwest Should Do
There’s no doubt that with Elliott’s plan, the future of Southwest is in jeopardy. Their corporate culture and business strategy works, and has worked for a long time. Sure, it could use a bit of tweaking, especially in light of their current financial performance, but to change what makes Southwest Southwest would be a terrible idea and just shows that you don’t understand the business, care exclusively about a quick return, or both.
While I’m not an airline industry expert, I believe there are some low-hanging fruits Southwest can take advantage of to improve its financial performance and, in some cases, passengers’ experience. First, and perhaps the easiest, is probably to start charging a second checked-bag fee. This is something Cranky suggests, too, but it is something I’ve also long thought should be done. After all, each passenger gets two checked bags for free, but I highly doubt most uses, especially since things like surfboards fly for free.
Next, Southwest needs to start flying overnight flights to make better use of its fleet. Of course, this is something we already know is being worked on, and an announcement for the first routes could happen at any time. With that change, another thing that could be done is to either move to assigned seating or partially assigned seating to accommodate a small selection of premium seats, like Spirit’s Big Front Seats.
Finally, Southwest needs to do something about pre-boarding abuse. I’m in no position to judge, but on my most recent flights with them, I noticed that there were passengers with pre-boarding who didn’t actually need assistance. For example, some dashed over to the gate for pre-boarding (adults needing assistance with no kids). Another seemed to walk to the gate slowly; however, upon arrival at our destination, he refused assistance getting off the plane and walked pretty quickly up the ramp. Why does this matter? Because these passengers board before even positions A1 to A15, reducing the value of Early Boarding, which is an important source of additional revenue for the airline.
The Future of Southwest is in Jeopardy, Final Thoughts
Honestly, Elliott makes me nervous. Their incompetence when it comes to understanding airline operations is a huge concern and is why the future of Southwest is in jeopardy. No, I wouldn’t consider myself a Southwest loyalist, but I do love to use them to travel within Hawai’i. After all, they offer much better value than Hawaiian and their award flights cost far less, and that’s something I’d hate to lose. At least for now.