The Downfall of Southwest Airlines

The Downfall of Southwest Airlines

Southwest Airlines used to be the stuff of legend. An audacious upstart turned industry giant. It pioneered a brand new class of airline, then grew into the fifth largest air carrier in the world. It flies more passengers than Lufansza. It brings in more revenue than Air China. It flies more aircraft than Ryionaire. It operates more routes than American. Throughout much of the 2010s, Southwest was amongst the most profitable airlines in the world, operating with a 20% margin in an industry where one’s lucky to make five or 10. Even more remarkable, they did so while maintaining a comparatively positive public image. Customers loved their free checked bags, free cancellations, expiration free flight credits, open seating, and anecdotally stellar customer service. You paid one fair, and there were barely even opportunities for upcharge. For decades upon decades, it stayed egalitarian, ethical, and just simply excellent until now. Over the past year, Southwest has changed. Free bags now cost $35. Flight credits now expire. Open equal seating was replaced with reserve seating, including an extra leg room section available for a fee, created by reducing everyone else’s legroom by an inch. In one quick moment, Southwest eroded five decades of industry-leading brand image in favor of squeezing the customers for more. Although, it’s not just that greed finally corrupted a previously benevolent executive team. It’s a far more complicated story. A hostile force infiltrated the company and forced it to turn against its core principles. It’s an age-old tale. It’s the story of big finance destroying one of America’s most beloved institutions. It was here at the St. Anony’s Club in San Antonio, Texas, that entrepreneur Rand King met with his lawyer, Herb Keller, for a cocktail in 1966. At the time, Keller was helping King, who was an amateur pilot, liquidate his air charter company. King had bigger dreams. He’d been watching the success of Pacific Southwest Airlines in California and thought something similar, a lowcost air carrier serving one state exclusively, could work in Texas to transport people between San Antonio, Dallas, and Houston. The three cities, connected by economics but disconnected by distance, became known as the Texas Triangle after King jotted down a sketch of the routes on the back of a cocktail napkin. At least according to the company’s founding mythology. It was an idea that would almost exclusively work with Texas’s unique geography. It’s a large enough state that it’s unreasonable or at least inconvenient to drive between cities for business. But its borders still contain a state which left it unregulated by the Civil Aeronautics Board, a precursor to the Federal Aviation Administration, which at the time only oversaw flights that crossed state lines. The CAB’s oversight at the time included setting fairs and gatekeeping which airlines could enter the market, meaning exclusively interrastate carriers like Southwest had the unique right to set their own flight schedules, rates, and frequencies. Naturally, some of the existing interstate carriers, Braniff, Transex, and Continental read between the lines and fought to stop Southwest’s entry into the market, seeing that it would immediately undercut their higher regulated fairs. It cost the fledgling Southwest Co. nearly half a million dollars to fight them. But those lawsuits didn’t hold up in court. In 1971, newly named Southwest Airlines acquired three Boeing 737200s, hired pilots from the folding Purdue Airlines, and copied Pacific Southwest’s manuals. And by June 18th of that year, Southwest launched service with 12 weekly flights between Dallas Lovefield and Houston and 6 weekly from Lovefield to San Antonio. After launch, a series of decisions that were both strategic and simply lucky paid off for decades and built the foundation of the company’s success. Southwest initially focused on business travelers, a market that couldn’t and wouldn’t see much growth. Out of necessity, it started to run a Friday evening repositioning flight that quickly grew in unexpected popularity, enough for them to double down on weekend travel as a revenue source and establish a distinction between executive and pleasure fairs. It might seem rather pedestrian now, but this two-tier fair structure offering discounted rates for flights after 6:59 p.m. was innovative at the time and proved critical for the company’s economic model to undercut competitors simply because its intrastate status meant it could and because it allowed it to tap into a price sensitive market that other airlines couldn’t. As passenger load increased, almost quintupling per aircraft, so did the airlines fight to stay here at Love Field. All commercial air service was previously agreed to move to Dallas Fort Worth International Airport by 1974. But because that agreement was in place before Southwest officially existed, it argued it could stay at Love Field, 16 mi closer to Dallas City Center and that much closer to its customer base. Lovefield wasn’t just a place for Southwest, though. It also was its identity. Early on, the company seized the Love branding. It incorporated warm colors in its logo. It used a heart for some of its marketing. It aimed to hire pretty flight attendants and it adopted a playful approach to messaging. As decades went by, flying Southwest was more than transportation. It was a feeling. This matched with competitive low fairs, first come first- serve boarding, no baggage fees, and point-to-point flights instead of the classic hub and spoke were all market differentiators. Southwest grew and it grew, expanding routes throughout Texas and then through the Southwest. It acquired smaller airlines like Muse along the way, continuing its national march to more destinations, but maintaining its sites on pointto-point service that was simple. By 2010, it took over Airtra Airways, a $ 1.4 billion deal that gave them access to Atlanta, Milwaukee, and expanded presence in Baltimore and Orlando. And this acquisition, after completion, allowed Southwest to enter the international market in 2014 and put Cancun, Montego Bay, and Aruba on its route map. By 2017, Southwest had grown into one of the country’s largest airlines. It boasted an unprecedented 45 consecutive years of profitability and its fourth record-breaking year with $3.5 billion in net income. It was America’s largest domestic airline, a distinction achieved by focusing on highfrequency short hall flights. And it consistently ranked among top airlines for customer service and even higher for employee favorability, continually being listed as one of Fortune’s top 10 most admired companies. Under the hood, Southwest was even more anomalous amongst large, highly profitable companies. What started with Keller in the 70s as a moral decision evolved into a competitive one. Southwest argued that taking good care of their staff allowed them to take good care of their customers. The company’s track record included never laying off or furlowing employees, entering them into a profit sharing program, maintaining a high turnover rate lower than 5%, and promoting primarily from within, even for its executive ranks. Bob Jordan, the current CEO, has been with the company for 37 years, starting with the company as a 27-year-old programmer and shuffling through 15 roles before ending up with the top job. The fact that the decision makers from the airline didn’t come from other airlines who did things differently was almost certainly why the airline stayed so unique for so long. It wasn’t a budget airline, but it wasn’t full service either. Its route network was different. It treated employees different. It treated customers different. It was a fairy tale scenario where everyone won. Employees, customers, and even investors. But then the winds shifted and two storms named Elliot began to brew. Southwest Airlines struggled during CO, but so did everyone. Budget airlines, full service network carriers, large flag carriers, small domestic operators. It was bad for everyone. And comparatively, Southwest did fine. In fact, as domestic travel started to return in 2021, Southwest outperformed the industry. Whereas United, Delta, and American had to keep paying the bills on expensive widebody planes that had little purpose as longhaul travel stayed nearly non-existent, the airlines narrowbody fleet was perfectly suited for capturing the strong pent-up demand for domestic leisure travel as restrictions subsided faster than in the rest of the world. The airline even maintained its no layoff policy as the rest of the industry cut back its workforce on mass. Southwest stayed agile and quickly launched routes to outdoorsy destinations like Telleluride, Colorado and Palm Springs, California. All signs pointed to 2020 being a rare, singular, and entirely understandable blip in an almost 5 decade legacy of non-stop financial dominance. That was until around 400 p.m. on December 21st, 2022. Over the following hour, the temperature in Denver plunged precipitously from 42 to just 5° in 60 short minutes. These were the opening moments of winter storm Elliot. As evening came and the light faded, winds picked up, snow moved in, and the air grew ever colder, dipping deeper and deeper below zero. All the while, on the ramp of Denver Airport’s Terminal C, operations began to unravel. Denver airport is used to winter weather, but not of this severity. Denver is often cold, but not this cold. During the overnight hours, the thermometer bottomed out at -24 Fahrenheit or -31 Celsius, and the daytime sun warmed this up no higher than -6 or -21. About half of Southwest’s flights canled, whereas the other half went out massively delayed as ground operations crawled. Deicing was particularly troublesome. Whereas most airlines in Denver hire thirdparty contractors to spray their aircraft with the fluid, Southwest does it themselves. They own their own rigs operated by their own employees on their own deicing pads. But again, in an effort to cut costs, Southwest’s deicing rigs are not like the others. They feature an open basket akin to a cherry picker, which not only costs less, but is claimed to be more efficient in normal winter operations thanks to its limitless visibility. In this storm’s conditions though, the exposure meant the subset of staff trained in deicing operations had to be swapped out frequently to prevent frostbite and hypothermia, further limiting already constrained capacity. All the while, United, Frontier, and other Denver-based airlines suffered from only limited delays thanks to the warmer enclosed deicing rigs their contractors used. Now, Denver experiences major winter storms that debilitate its airport with some regularity. And when that occurs, Southwest operations to and from the city certainly suffer, but they’re typically able to confine the impact decently. Not this time, though. When something went wrong in Southwest’s network, it was up to its proprietary Skyolver software to fix it. If, for whatever reason, a flight needed to cancel, Skyolver would propose a solution that would attempt to isolate the impact. If, for example, a flight crew was scheduled to fly from Denver to Oklahoma City to Orlando, but due to deicing delays in Denver, no longer had enough available hours left in their days to operate the onward flight while complying with FAA regulations, Skysolver might propose deadheading a reserve crew on call in Dallas up to Oklahoma City to take over the aircraft. This function was particularly important for Southwest as the point-to-point nature of its network left it uniquely vulnerable to cascading disruption. Whereas United, Delta, and American operate hub and spoke networks where almost every flight starts or ends at a base with extra crew and aircraft capable of swapping in, Southwest schedules involve plenty of flights between smaller non-hub airports operated as an extension of a flight from a hub. So, in a disruption, Skyolver’s job was to look at all available resources, captains, flight attendants, aircraft, and allocate them in a way that would lead to as little operational issues as possible. The only problem was it wasn’t very good at that. As Wintertorm Elliot swept eastward, its impact expanded. Now both Denver and Chicago were suffering. But strangely, Skyolver’s limitations cascaded these isolated hub city disruptions into a full-blown countrywide operational meltdown. The fact that Chicago got cold was causing cancellations in Honolulu. You see, Skyolver took about 25 minutes to run and propose one set of solutions. In a high impact storm like Elliot, though, the situation was certain to have changed within any span of 25 minutes. Whereas, when a run started, there might have been a flight available from Dallas to Oklahoma City to deadhead a crew in and save the Orlando flight. Minutes later, that flight might have canceled due to its inbound aircraft going below fuel minimums while waiting for deicing in Chicago. Additionally, Skyolver could only solve future problems, not existing ones. As soon as the scheduled departure time of a flight passed, it quite literally was not technically capable of addressing the issue, and a human had to manually find a solution. As daily cancellations started to count in the thousands, the desk tasked with solving these issues was quickly overwhelmed, meaning it was taking longer and longer to find crew or aircraft to operate disrupted flights, leading to more cancellations. And with more flights canceled or delayed, it became trickier to move crew around to operate the flights they were intended to. All the while, Skyolver was sending crew on nonsensical routings as it struggled to keep up with the degree of disruption. One pilot reported being tasked to dead head, as in fly as a passenger, from Baltimore to Manchester to Nashville to Chicago, then back to Baltimore, all without operating an actual flight. As the meltdown escalated to over 50% of flights canled, the airline quite literally lost track of where all its crew were. When they ended up in a place different than originally scheduled, crew were supposed to call in to the airlines hotel desk at its network operation center in Dallas. Although this desk was only regularly staffed by two people, it too was quickly overwhelmed. And even as the airlines scrambled to train more people to fulfill its function, flight crews waited for hours on hold. In all the time they waited on hold, crews were not accumulating the FAA mandated rest hours that would allow them to operate the next day’s flights. Once again, further escalating the cycle of meltdown. Eventually, Skyolver and the airlines other antiquated automated systems grew so unhelpful that the airline reverted to near complete manual control. Humans took over crew, aircraft, and flight scheduling and attempted to get the airline back on track. By Christmas, the storm had largely passed, but even with the airlines limited holiday schedule, they struggled to get back on track. So, the decision was made to essentially force reset the airline. They’d preemptively cancel nearly twothirds of the next day’s flights and stopped ticket sales altogether. They operated dozens of flights without passengers just for the purposes of getting aircraft and crew to the right places to start flying a normal schedule again. This process still took days, and it wasn’t until December 30th, more than a week after the temperature plunged in Denver, that operations resembled a normal day. Throughout the meltdown, the airline canled over 15,000 flights. These occurred during one of the busiest and most lucrative travel weeks of the year, translating to over $400 million in loss revenue and disproportionately high profit loss. But then they had to pay for passenger hotels, for meals, for flights on other airlines, and for compensation for their troubles, which added up to about $600 million in expenses. On top of that, the Department of Transportation fined the airline $140 million for their failings, and the negative brand impacts led to an estimated loss of about $300 million in bookings for the following quarter. So, summing it all up, Southwest’s antiquated technology and reluctance to invest in its infrastructure led to an almost $1.5 billion loss. But then came 2023, and even as the operational meltdown faded into distant memory, the airlines financial prospects failed to reverse. In fact, they only got worse. As United, Delta, and other US airlines booked higher and higher profits as CO’s pent-up demand surged into a record travel period in the US, Southwest was moving in the opposite direction. After booking almost a billion in profit in 2021, 2022 saw just $539 million. although easy to brush off as a lingering consequence of the meltdown. But then 2023 ended and profit dipped further, just $465 million for the year. Increasingly, it appeared that Southwest’s changing fortunes were not a short-term remnant of a high-profile debacle, but actually reflective of changing market dynamics in the American airline industry. JetBlue, Spirit, and other lowcost carriers were following a similar trend. high fuel costs, aircraft shortages due to engine reliability issues, airspace disruptions due to air traffic controller shortages and an uptick in severe weather, pilot shortages pushing up personnel costs. The causes were myriad, but the result was singular. American lowcost carriers, whether they be true budget airlines like Spirit and Frontier or hybrid operators like JetBlue and Southwest, were failing to return to their precoid earnings. While Southwest has been a publicly traded company since the 1970s, the compiling complications of COVID, the 2022 meltdown, and the general inability to adapt to a changing market left Southwest uniquely vulnerable for the first time in the company’s history. Generally, a consistent stock and a trusted leadership group fostered a fairly loyal, fairly content set of shareholders. But now things had gotten shaky and in June of 2024, a lurking firm acted on the instability when Elliot Investment Management bought a $ 1.9 billion stake in the airline. With an 11% claim to Southwest’s equity, Elliot’s announcement was a bombshell. As perhaps the single most infamous of activist investors, when Elliot buys into a company, the news often signals a turning point as the firm is notorious for pressuring radical business strategy pivots and ruthless board and seauite restructurings to boost shareholder value. For the characteristically friendly, familyoriented carrier associated with prioritizing people and culture over money and shareholder value, the news was chilling. Suddenly, the future of Southwest was up for grabs as two visions, that of Elliot and that of Southwest’s legacy leadership were set to fight for shareholder support. The fight started with who was at the top. To turn Southwest into a money maker, Elliot argued the carrier had to fundamentally shake things up. To fundamentally shake things up, they went for the head of the snake. In their analysis, the current executive chairman Gary Kelly and CEO Bob Jordan were part of the problem, and they needed to go. Equally unflinching though was Southwest as it in no uncertain terms responded that Bob Jordan wouldn’t be stepping down. If leadership was going to be shaken up, then Elliot needed more than rhetoric. Not only would they need to convince fellow shareholders that current leadership was unfit to lead Southwest, they needed to set up a special meeting where that opinion could be voted on. A special meeting of shareholders where they could oust board members outright. But this would take some maneuvering. In order to call such a meeting outside the schedule of annual meetings, Elliot would have to reach a threshold of company ownership outlined in article 2, section 3 of the airlines bylaws, 10% of all company shares. While Elliot claimed an 11% stake in the company, some of this ownership was tied up in derivatives or contracts to trade the stock over at a different point rather than just common Southwest stock. So began to move to convert more into common stock to reach the 10% threshold to trigger a meeting. Southwest countered. Within a month of Elliot’s entrance, the airline adopted a shareholders rights plan, or what’s more often referred to as a poison pill. Should any one shareholder, in this case Elliot, reach a 12.5% ownership of the company’s common stock, other shareholders would then be allowed to buy stock at a 50% discount, ensuring that the cut rate would induce purchasing from across the shareholder base and stall the advance of the takeover, in this case from Elliot. While representatives of both parties offered public statements affirming their belief in good faith negotiating and collaboration, the lines were being drawn in what looked to be a building battle for the boardroom. Now, Southwest leadership was fighting to prove itself to its shareholders on two fronts. It was trying to hold off Elliot’s alternative vision for the company on one and show it could get back in the good graces of the flying public on the other. A move that may help on both, it gambled, was sacrificing a central pillar of its identity, open seating. Historically, open seating, where passengers boarded and just took any seat they wanted, allowed Southwest to fill its planes faster, and faster boarding meant faster turnarounds, and faster turnarounds meant more and thus cheaper flights. But assigned seating is the industry norm, and it would allow Southwest to then sell seats with more legroom for an upcharge. This move, along with announcing the addition of redeye flights by Valentine’s Day of 2025, were drastic deviations from the Southwest of old, but still not drastic enough for Elliot’s vision. These new changes, they argued, were too little too late from who they believed a failed leadership team. Applying pressure, the firm publicly announced its list of candidates to join the board of directors. For the 15 seats, Elliot brought forward 10 names, most of which with airline experience, and many with CEO level experience at the likes of Virgin America, American Airlines, WestJet, Air Canada, and Ryan Air. For Southwest, with a long history of doing things its way and developing its leadership team from within, this list of names represented a radical departure from the Herb Keller way. Publicly, they resisted. They again backed their CEO and their board. But behind the scenes, they recognized Elliot wouldn’t relent. And if they didn’t act to reconcile, the firm would only begin to turn more investors against the leadership of the hesitant to change carrier. So Gary Kelly, executive chairman of the board and former CEO, along with two unnamed directors, went to New York to meet with Elliot officials. The next day came this. An investor update from Kelly announcing that he’d be retiring from the board in the spring while six board members would retire in November and that Bob Jordan would remain on as CEO while a new comprehensive plan would be released on investor day. Southwest had conceded. Yet Elliot still wasn’t sold that it was enough releasing this statement in the move’s wake. It was a step in the right direction, but again more change was needed. Elliot still planned to move forward its push for a special meeting to oust eight board members without cause and it continued to posture it was going to continue to fight the proxy battle for the board. Then finally in mid-occtober a deal that worked for Elliot. Bob Jordan would stay on as CEO but Kelly’s retirement would be fasttracked and the board would be overhauled with five directors nominated by Elliot taking seats on a 13 seat board. The news represented a long-awaited peace deal in a building boardroom war. It also effectively marked the death of Southwest. Throughout this boardroom drama, most of what the public experienced was the betrayal of their trust in the company. The policy changes of reserved seating, charged bags, and more. All done as concessions towards Elliot’s demands. Now, the Elliot’s argument was simple and intuitive. that the airline was failing and that other airlines that had the unpopular policies they pushed through were succeeding and therefore Southwest should mimic their strategy. This makes sense in a slide deck and makes sense to shareholders and honestly it very well might prove a winning strategy for Elliot. Right now Southwest business model is not working and it’s not an anomaly. The lowcost business model is not working industrywide in the US. In the next couple of years, it is possible, even likely, that the changes Elliot pushed through will lead to higher profits than if the airline had stayed the course. But then there’s the rest of time. Southwest’s business model has been failing for just two or three years. Previously, it succeeded phenomenally for almost 50. And that success was built on a unique value proposition that only they offered, meaning they held a strong competitive advantage. Today, mimicking traditional airlines, they’re competing head-on with industry giants. They can try to win on price and convenience, but few will go out of their way to fly Southwest like they did in the past. The cult of Southwest is no longer. When the winds change and the storm clears, Southwest will emerge weaker. Their eroded competitive advantage and depleted brand image will reduce profits for decades to come. Customers are losing out as the airline rolls out policies that squeeze them for more. Employees are losing out as the no layoff policy came to an end in February 2025 and as the board now includes executives from outside that are unlikely to follow the Southwest ethos. The fairy tale is over. The only winner will be Elliot. Over the coming years, Elliot will liquidate their shares, turn a profit, high-fiving in the Hamptons, then move on to their next victim, gobbling up companies and jobs while confident they’re just doing what is necessary for the allholy fiduciary responsibility to investors. Another industry that has

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Writing by Sam Denby, Tristan Purdy, and Christine Benedetti
Editing by Alexander Williard
Animation by Gabriel Ferreras, Austin Glass, Kate Ermolenko, Sara Stoltman
Sound by Manni Simon and Dony Bullen
Thumbnail by Simon Buckmaster