By Niraj Chokshi
Three years prior, Southwest Airlines began operations from Bellingham, Washington, a burgeoning city adjacent to the Canadian border, striving to replicate its success seen in numerous smaller airports — providing numerous tickets to travelers with limited alternatives.
Bellingham officials and residents were ecstatic as the airline introduced new nonstop routes to destinations along the West Coast at budget-friendly rates.
“The community welcomed them, and we were delighted to have them here,” stated Rob Fix, executive director of the Port of Bellingham, which manages the airport.
However, the expansion didn’t unfold as intended. This year, confronted with unforeseen expenses and obstacles, Southwest exited Bellingham along with several other newly served cities during an ambitious growth phase early in the pandemic recovery — markets deemed to be underperforming.
This withdrawal marked a significant setback for Southwest. For over fifty years, the airline’s straightforward approach of offering low fares and quality service, frequently at smaller airports close to major cities, proved remarkably lucrative, yielding steady profits while many competitors faltered. Yet, this strategy now appears less effective, raising doubts about its ability to regain previous success.
“Southwest had remarkable success by sticking to one business model for many years, but the surrounding environment shifted, and they struggled to adapt,” remarked David Neeleman, an airline entrepreneur who sold his initial airline to Southwest in 1993 before establishing JetBlue and Breeze Airways.
Some analysts argue that Southwest’s prolonged success led to a sense of complacency, as it shied away from strategies employed by other airlines to enhance profits and attract customers, such as providing more premium seating options and services.
Throughout the years, airlines have segmented their cabin configurations into various service classes and fare tiers. They have targeted budget-conscious travelers with restrictive economy fares while catering to more affluent customers with additional amenities. Southwest made slight modifications, such as offering priority boarding to attract business travelers, but fundamentally remained committed to its traditional approach.
The airline’s longstanding practice of operating a single aircraft model — the Boeing 737 — to minimize expenses and ensure adaptability also turned into a drawback. Production of 737 jets faced severe limitations due to a quality crisis and a debilitating strike at Boeing this year. Southwest now anticipates receiving only 20 new planes in 2024, far fewer than its expectations from just a year ago.
Southwest’s difficulties have become evident in its recent financial results. In the first nine months of this year, the company reported a profit of $204 million, significantly trailing behind Delta Air Lines’ $2.6 billion and United Airlines’ $2.2 billion.
These shortcomings led Elliott Management, a hedge fund, to target Southwest, revealing this summer that it had accumulated a 10% stake in the airline.
Elliott criticized Southwest for failing to manage costs effectively, which diminished its previously enviable profit margins, and called for significant changes, including the ousting of CEO Bob Jordan. The firm pointed to the airline’s stock decline and a chaotic situation two years ago when it canceled thousands of flights, highlighting weaknesses in leadership and operational efficiency.
In response, Southwest expedited several modifications.
In September, Jordan introduced a three-year plan that involved implementing assigned seating to streamline boarding and satisfy customers unhappy with the existing self-serve seating arrangement. Southwest also announced it would introduce seats with greater legroom, for which it would charge extra, as well as overnight flights to maximize aircraft utilization.
Moreover, the airline welcomed board members selected by the investment firm, leading Elliott to retract its call for Jordan’s removal.
Southwest declined interview requests for Jordan regarding this article, but he informed investors last month that he and the company recognized the necessity for major transformations. “We are focused on the future as we aim to position Southwest for enduring success,” he remarked.
Even before Elliott’s involvement, Southwest had initiated several enhancements. In 2022, it announced plans to install power outlets in every seat, upgrade internet service, and increase overhead bin sizes. This year, it finally permitted flights to be listed on third-party booking platforms like Google Flights and Kayak.
The transformation of an airline
Despite recent profit challenges, the airline enjoyed an unparalleled 47-year streak of annual profits until the pandemic halted travel. It posted losses in 2020 alongside the rest of the industry but has recorded profits each year since.
Southwest remains the only one of the four largest U.S. airlines that has never sought bankruptcy protection.
Today, Southwest transports more passengers than any other U.S. airline and operates more flights than all airlines worldwide, except American Airlines. According to J.D. Power, travelers have ranked its economy class as the best in North America for three consecutive years.
For decades, Southwest flourished by sticking to a straightforward model of low prices and quality service, laced with a playful irreverence.
The airline commenced operations in 1971 from Dallas Love Field, maintaining its presence there for years despite the emergence of the much larger Dallas-Fort Worth International Airport shortly after the airline’s inception. Initially, the airline connected Dallas with Houston and San Antonio, marketing itself as an alternative to driving, but quickly evolved into a transformative force.
Braniff International, another Dallas-based airline, attempted to undermine Southwest in its early days with $13 fares. Southwest matched these fares at a loss but also incentivized customers paying the full $26 fare with a complimentary bottle of liquor, attractive to many business travelers, ensuring Southwest’s viability.
Over time, the airline often began servicing smaller airports neglected or underserved by competitors. This phenomenon, termed the “Southwest effect,” typically led to increased demand and pushed other airlines to lower their fares. In the 1990s, it was among the first U.S. airlines to directly sell tickets online.
Southwest’s accomplishments prompted the rise of imitators and inspired low-fare airlines to emerge globally.
However, its model has faced challenges for several years. As it expanded, it started operating in airports where maintaining low costs and frequent services proved more complicated.
For instance, Southwest now operates flights to Hawaii, necessitating additional pilot training and aircraft certification for over-water operations. It also began flying international routes and entering congested airports like New York’s LaGuardia.
“The very elements that made its model extraordinary also constrained its potential for growth,” explained David Vernon, an analyst at Bernstein, an investment firm. “The agility to maintain high-frequency service has a limited number of viable locations.”
