Southwest Airlines Faces Pressure to Modernize Operations

Southwest Airlines is facing growing pressure from activist investors who believe the company’s business model is outdated. The pressure is increasing on CEO Robert Jordan to modernize Southwest’s operations and regain the airline’s profitability after the challenges caused by the pandemic. Analysts and investors have raised concerns that the airline’s current approach may no longer be effective in today’s competitive environment.

A report from Reuters said that Southwest is preparing for a key investor meeting on October 19, 2024, where the airline is expected to present its long-term strategy for profitability. Planned changes include the introduction of assigned seating and extra-legroom options, a shift toward offerings that airlines like Delta and United have successfully implemented. These changes would help Southwest cater to more premium travelers and tap into higher-margin revenue.

Andrew Watterson, Southwest’s Chief Operating Officer, has told staff that the airline needs to adjust its network to better reflect shifts in travel patterns following the pandemic. He emphasized that while some cities will see changes in service levels, Southwest has no plans to stop serving any of them. On October 18, 2024, the airline announced plans to reduce services in Atlanta next year.

Despite the proposed changes, some investors remain concerned. Elliott Investment Management, a major shareholder, has launched a campaign to replace CEO Robert Jordan and other top executives. Elliott believes the airline has been slow to evolve and that more extensive changes are necessary to keep Southwest competitive and profitable.

Before the pandemic, Southwest was a leader in profitability, boasting 47 consecutive years of financial success. However, since the pandemic, the airline has struggled to regain its financial strength. Some critics argue that the company’s leadership has been too focused on maintaining its traditional approach rather than adapting to the current market. “They’ve stuck to the ‘Southwest way’ for too long without adjusting to industry changes,” said Rob Britton, a professor at Georgetown University.

Southwest responded by emphasizing that it makes data-driven decisions and carefully evaluates which markets to serve and how to adjust its business model. A company spokesperson added that the airline’s focus is on ensuring long-term success.

Responding to the Premium Travel Market

During the pandemic, Southwest expanded into 18 new markets, following a strategy that had worked in the past during economic downturns. However, the unique circumstances created by the pandemic, including government aid, led to unexpected challenges, and the airline’s rapid expansion affected its profit margins.

Southwest has also been slow to respond to the growing demand for premium travel, which is an important source of revenue for many airlines. Initially, the airline downplayed the trend, but in mid-2024, Southwest announced plans to introduce assigned seating and extra-legroom options to attract premium travelers. These moves mark a shift in strategy as the airline looks to capture a higher-margin customer base.

“Southwest became too comfortable with its success, and now they are paying for it,” said Henry Harteveldt, founder of the travel consultancy Atmosphere Research Group.

Technology and Operational Changes

Southwest has also faced criticism for its slower adoption of new technologies. The airline only started using SkyPath, a software tool that helps pilots navigate turbulence using GPS and iPad sensors, earlier this year. Other major airlines, such as United and American, have been using this technology for years. Southwest has explained that it took time to fully integrate the software into its systems and ensure its pilots were properly trained, but some see this as another example of the airline falling behind its competitors.

Despite these issues, CEO Robert Jordan has pointed to Southwest’s recent investments in technology as a sign of progress. In a recent podcast, he mentioned that the airline’s smooth operations during a global cyber outage in July were due to the benefits of these technology investments.

Southwest’s focus on keeping costs low was a major contributor to its success before the pandemic. However, the airline’s operating expenses have significantly increased, with the company spending 99% of its revenue on costs last year, compared to 80% in 2015. This sharp rise in expenses has raised questions about whether the airline can sustain profitability without more changes.

One of the major criticisms of Southwest is its limited efforts to expand into international markets. Unlike its European counterpart Ryanair, Southwest has only recently made its flights available on third-party booking platforms. Additionally, the airline continues to sell tickets exclusively in U.S. dollars, limiting its ability to serve customers internationally.

Brett Snyder, an airline analyst, pointed out that Southwest’s reliance on its current fleet and network meant that the airline would eventually hit a limit in terms of growth. “Southwest needed to plan for future growth instead of relying on what worked in the past,” Snyder said.