Southwest’s Conundrum 🛫
Southwest built its reputation by creating a “no frills” flying experience.
Open seating, no bag fees, and low fares.
It worked. Southwest grew fast, kept expenses lower than everyone else, and posted profits for 47 straight years until the pandemic.
But it’s no longer working for them. Southwest’s operating expenses have ballooned from an increase in fuel, labor, and airport costs, which has cut their profit margins.
Southwest shares (down ~1% year-to-date) are lagging behind competitors United Air Lines (up 20% year-to-date) and Delta Air Lines (up 23% year-to-date), and annual profits are declining.
While Southwest’s bag policy is off the table for now, as half of its customers indicate they fly Southwest for that reason, the airline is studying whether it should start assigning seats.
Airline unit economics have changed, and Southwest's top shareholder, Elliott Investment Management, is demanding that it reconsider its business model.
