| Southwest Changed Flying. Now It Can't Change Fast Enough. -- WSJ | |
Dow Jones Newswires June 14, 2024 09:00:00 PM ET
Southwest Airlines' headquarters is a monument to its history.
Herb Kelleher's office has been painstakingly reassembled behind glass for employees to view, down to the tape dispenser on his desk and the ashtrays on his coffee table. Press a button in another corner of the building and you can hear a recording of the legendary laugh of Kelleher, the airline's co-founder and former chief executive, who died in 2019.
Thousands of photos, news clippings, old advertisements and other memorabilia line the hallway walls of the airline's Dallas offices. Models of Boeing 737 jets decked out in Southwest colors hang from the lobby ceiling.
Elliott Investment Management, the influential New York hedge fund, says Southwest is stuck in the past. The activist investor says it has amassed a $1.9 billion stake, which amounts to an approximately 11% economic interest in the airline, making it one of Southwest's biggest shareholders -- and its most vocal critics. This past week it demanded Southwest oust its CEO, overhaul the board, and consider shaking up its business model.
Southwest became the biggest U.S. airline by domestic passengers by doing things its own way. Trouble is, that's no longer working so well.
Expenses have ballooned and profit margins lag behind some rivals'. The airline is on track to receive only a quarter of the new jets it was expecting this year from Boeing, leading to bloated overhead. It is backtracking on pieces of an aggressive expansion strategy at a time when Americans are booking more flights than ever.
For decades, Southwest and its unflinchingly loyal base of fliers and employees were the envy of the U.S. aviation industry. The plucky, innovative airline spawned legions of copycats mimicking its simple operation, inspired business- school case studies, and generated industry-leading profit margins.
Southwest is so serious about improving its finances the airline is contemplating radical changes to its hallmarks. It is studying whether to start assigning seats, shake up boarding or offer some rows with extra legroom for a fee to widen its appeal. It has started putting its fares in Google Flights, an airfare search site it long avoided because it preferred that customers book trips on its own website or app.
Sacrificing attributes that helped make Southwest a fan favorite, like free checked bags, is a no-go for now.
"You cannot be stubborn about change," CEO Bob Jordan said Wednesday at an industry event. "At the same time, we're going to stick to our values."
Elliott is a formidable opponent. The hedge fund founded in 1977 by billionaire investor Paul Singer is one of the biggest and busiest activist investors, and its campaigns can turn rancorous.
It is known for never going into an investment without having several ways to win and for forcing changes that include management shake-ups or outright sales. The hedge fund waged a 15-year crusade to get the nation of Argentina to make payments on defaulted sovereign debt, and won in a massively lucrative bet. Several companies in which Elliott has recently built positions have ultimately replaced their CEOs, including the big wireless-tower owner Crown Castle, NRG Energy and Goodyear Tire & Rubber.
Some activists avoid airlines because regulators and unions have hefty influence over company operations, making them especially unpredictable investments. But billionaire investor Carl Icahn struck a deal for two seats on JetBlue Airways's board after unveiling a big stake earlier this year.
Southwest finds itself in a new, uncomfortable position: trying to win over fliers who don't get what's so great about it. Fares aren't always cheapest, and Southwest's cabins lack in-flight amenities that travelers have come to expect, such as seat-back entertainment and extra-legroom options. It only recently began adding power outlets and upgrading Wi-Fi to higher speeds.
Mitch Berk, a salesman who lives in Belleair, Fla., became a big Southwest fan when he lived near its hub at Baltimore/Washington International Airport. He loved the nonstop flights and earned the airline's coveted companion pass for his frequent travels.
Today, he picks discounter Allegiant over Southwest on some business trips because Southwest has cut back on nonstop options.
Berk wishes Southwest would assign seats to make boarding less chaotic -- a suggestion he says he offered on a survey from the airline after a recent flight to New Orleans.
"I know the open seating was intended to turn the plane around faster," he says, "but I don't think that's benefiting them anymore."
Some investors are growing impatient. Shares are down nearly 24% over the last two years, while United Airlines is up 34% and Delta Air Lines is up 55% over that time.
The Artisan Partners Global Value Team, whose clients hold about 1.8% of Southwest shares, has raised its own concerns about the airline's performance and management with Southwest's board chairman since the start of this year, said Dan O'Keefe, lead portfolio manager. The investment firm also wants Jordan fired.
"Southwest's rigid commitment to an approach developed decades ago has inhibited its ability to compete in the modern airline industry," Elliott wrote in a letter to the airline's board this past Monday.
'No-frills' flying
In its early days, Southwest wasn't particularly interested in how other airlines had done things. Kelleher wore a bag over his head in a 1980s commercial, after a rival airline executive suggested travelers should be embarrassed to fly no-frills Southwest.
The strategy worked. Southwest grew fast and kept costs lower than anyone else. It posted profits for 47 straight years until the Covid-19 pandemic in 2020 -- an unparalleled streak in a notoriously boom-and-bust industry. Corporate restructurings grew so common that Kelleher once described bankruptcy court as a "health spa" for airlines. Southwest has never filed.
Southwest's entry into a city would send rivals into a tizzy. The discounter swiped customers from competitors by undercutting their fares, and found new ones by offering nonstop routes that others didn't and tempting travelers to ditch road trips.
Employees, known internally as "Cohearts," were encouraged to think of Southwest like a family, and its irreverent work-hard, play-hard culture engendered fierce loyalty. New hires receive a standing ovation from employees who line the hallways at company headquarters. Flight attendants ad lib during onboard announcements.
"I got to where I stopped questioning them, because their results were so much better than anybody else's," said Doug Parker, the former American Airlines CEO who went head-to-head against Southwest for years.
But cracks have emerged. A late-2022 meltdown resulted in nearly 17,000 canceled flights, tarnishing the airline's reputation.
The airline has stumbled in trying to repeat its playbook of aggressive expansion into new markets, including Cozumel, Mexico, and Syracuse, N.Y.
Southwest's lenient policies on flight changes represented a key advantage that eroded when rivals eliminated most ticket-change fees during the pandemic.
Elliott's Sunday-afternoon call
Elliott spent about 18 months studying the industry and Southwest. It came to see Southwest as the ultimate airline fixer-upper: a floundering company with good bones, including a storied brand and a sterling balance sheet.
The hedge fund thinks fresh blood is key to a turnaround, and is pushing to replace some board members and executives. Elliott hired a recruiting firm to scout candidates, people familiar with the matter said. The new personnel would review the airline's operating strategy with an eye on cutting costs, improving technology, and boosting revenue.
Elliott isn't aiming to impose specific policies or transform Southwest into a legacy airline, according to people familiar with its thinking.
Elliott approached the airline this past Sunday afternoon. It held a brief call with Southwest Executive Chairman Gary Kelly and Jordan, the airline's CEO.
The next day, it made public a letter to the company's board and a presentation in which it criticized leaders for not embracing potential revenue boosters, like the fees other airlines charge for checking bags and reserving seats.
The airline had been preparing for a potential attack: It had already hired advisers at Bank of America and law firm Vinson & Elkins, according to people familiar with the matter. David Hess, who sits on Southwest's board, has also offered guidance. Hess has faced Elliott before: he was appointed a director of Arconic while the parts maker was in the midst of a tough fight with the hedge fund, and served as Arconic's interim CEO after its top executive was ousted.
The airline has sought to project calm. Jordan told employees in a memo Monday that it's "not at all unusual" for shareholders to comment on corporate strategy, and that the airline would engage as it does with any other investor. He has no plans to resign, he told reporters at an event in Washington, D.C., on Wednesday.
"Elliott is not directing the company," he said, adding that the hedge fund's presentation was "fairly light" on specifics it would like to change. Some ideas Elliott mentioned in its presentation are things Southwest is already looking at, the CEO said. The airline is planning to unveil its own plans at an investor day in September.
Some investors, analysts and industry observers think that bringing in an outsider to run the company would be a disaster, and that it makes sense for Southwest to be cautious about changing its offerings.
The activists are "dismissing something really important: the culture," Parker said. "Bringing in someone from outside ends it. You break the chain. It's done."
Beyond fares |
