An activist investor has just taken a big stake in Southwest Airlines, and hopes to push for changes that will improve the carrier’s financial performance, including replacing the company’s management. The big question is what those changes would look like, as they almost certainly wouldn’t be good for consumers.
Continue reading: Activist Investor Takes Big Stake In Southwest Airlines
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"Yes, the brand isn't doing quite as good as it used to, let's change everything about it so that it becomes completely unrecognizable! Surely that will cure all our ills!"
So hath said many, many, many MBAs, right before leading companies into Chapter 7...
Offer "domestic first class" seats for Business Select and improve its operational record (late/cancel rate) and we'll talk. Otherwise, no thanks.
Trading on the NYSE just opened and LUV is up 7% compared to slightly down for most indices and other airlines.
LUV has enough assets and has been well-run for long enough that it was set to turn around one way or another.
They already have a plan to turn things around - although they have moved slow to figure out alternatives to Boeing's delays and implement it - or an activist investor would jump in and try to make money.
This isn't much different from what is happening with JBLU but it does say that there is deep value in airlines and it will come out one way or another.
The answer is to sue Boeing for an ungodly amount of money, win, then live off that until Spirit, Frontier, and JetBlue drown and the market consolidates itself.
Someone give me an honorary MBA pls
Southwest has been living off the "Herb Kelleher had a well run airline" history for a while without recently being a well run airline.
I think is was the mid-80’s, hostile-takeovers were all the rage, somebody unexpected, doesn’t seem probable, I recall Korean Air, showed up in Herb Kelleher’s office, told him they were planning to buy enough SW stock to take it over. Herb laughed about it later, typical Herb, “I threw a stem-winding fit, hollering, pounding my desk, “I built this airline, don’t you think I know how to tear it apart before you get it, so it’s not worth a damn thing … and I’ll start the day you get enough stock to have to report to SEC!” Swore, man literally ran from his office, down the hall … “Maybe he’ll spread the word to anybody else with big ideas!”
They are still well run; the past CEO prioritized quarterly numbers over long term investment....example: decades behind the times IT capability. That will take time, those solutions are not a big bang. The under investment is showing. The problem with "activist investors" is they want to blow things up; i'm not sure that is the solution for WN.
Those of us who were bought by WN and told "drink the Koolaid" (and boy did I take pleasure in explaining that reference with photos of bodies lined up in Guyana to them) are loving this. So much what it looked like from inside WN... insular, we know best attitude. There is a magnificent powerful brand there with very high recognition, a lot of assets, a pretty good route network (for the size planes they have)... they just don't execute it well.
Activist investors are never good for the customer. Their goal is simply to raise the stock price, typically by cutting costs and making employees less happy and raising prices.
I think there is and always will be deep value in airlines. At least until we all get personal jet packs or somebody renders the airplane obsolete.
The presentation on the strongersouthwest.com site is interesting. Of course it has an agenda and there's a few things where meaning is slanted different than it was originally intended and obviously selective in which metrics used in comparison, but it does show a very clear picture of the underlying strength of what's at Southwest (though without strong leadership) and how underperforming they are in the industry, especially in comparison to DL and to a lesser extent UA. Not surprisingly, they outperform AA here and there. But I think WN has a stronger core than AA in brand, loyalty, certainly frontline employees, route coverage in individual cities, and physical assets.
SW is in its senior year, yet it acts like a first year freshman. Even Frontier and Spirit have moved up the maturity cycle, but SW hangs on to the "fun times" mindset and is falling way behind.
My suggestions:
- Business Class on the 1st two or three rows with extra leg room with complementary beverages and extra snacks. This brings in premium revenue which flows to both the top and bottom lines
- Assigned seats for ALL....none of this "reserved seat" BS which I have personally challenged on my most recent SW flight to the chagrin of my new seat mates. Also cuts down on the "Jesus Jetway" phenonema. Charge for the seats accordingly (exit rows, front to back, business, last minute purchase, etc).
- Maintain the direct flight formula which business PAX prefer over the hub & spoke
- Drop from two free bags to one. Passengers need to appreciate small mercies.
- Red eye flights if you must, but only between focus cities and business centers. No need to link Boise with FLL at 3:30 am.
- I get this feeling SW is running off an IBM 370, COBOL software, & T3 connections (you get the picture). It had to hire an outside agent (GE) to fix the December 2022 scheduling software fiasco. Time to bite the bullet, ditch the tape drives, buy a "shrink wrap" software package, move up to the Z, and start assigning seats on boarding passes. IT will feel better about itself in the morning!
Also, when Icahn attempted the takeover of JetBlue earlier this year, his two candidates for the BOD had "no voting rights" as per an agreement forced by Ms Joanna who is an attorney by trade.
Maybe B6 can fax a copy over to SW for review!!
And beyond that, they have a large customer base of infrequent fliers that continue to think they live in the age when SW *was* the cheapest fare most often. So, the early-90s to early 2000s. SW hasn't been cheaper in a long, LONG while. They're great at point-to-point flights, which some people absolutely love, but otherwise SW benefits from consumer ignorance and SW has been resting on that for a while and charging the same as - or more - than legacy airlines for a subjectively subpar product (depending on what you're looking for).
WN's failure is in remaining deeply loyal to Boeing even before covid and the wheels have been continually falling off ever since then.
WN has accepted BA's repeated "just six more months" mantra and failed to come up w/ alternatives to Boeing and to growing revenues with much fewer airplanes than Boeing promised Southwest.
WN is flying the fleet it has as hard as it can but they can only do so much.
of course it doesn't. but Icahn's interest in JBLU pushed that airline's stock up, JBLU simply accelerated the plans it already were planning including pushing out Robin Hayes, and not much else has changed.
There is no assurance that Elliott will do anything other than drive up the stock price and then cash out or reduce their holdings.
WN has a plan to turn things around; I doubt that Elliott can suggest anything WN doesn't already have on the table.
"example: decades behind the times IT capability. That will take time,"
Southwest went to full Amadeus back in 2017. They've had the I.T. capability to run a modern operation for many years now. Labor agreements and internally-imposed policy are what have held them back since then. Not I.T.
European-style business class up front with the middle seat blocked is low investment and would be great for high yield business traveler and premium leisure traveler revenue.
Guarantee the first thing to go is free checked bag considering the ridiculous amount of money the other airlines have made from it. When they swoop in they will want as much profit as possible wherever they can get it, future customer lost be damned because they have to appeal to investors that they did something financially good. I can't tell you how many times I've been in companies where it was taken over and hacked to bits in the first year and then the people responsible high tail it out to the next company to do the exact same thing elsewhere.
Disagree - in this case SW needs a kick in the behind. They need assigned seats, extra legroom seats etc in order to both generate better revenue and also offer a higher quality product. The recent increase in Early Bird fees is dumb. I've flown SW maybe 3 times in the last couple of years (flew them frequently when lived in Nashville in early 2000s due to having non-stop flights) and either bought Early Bird or status matched to A List which includes Early Bird. Only ONCE was I in group A (toward the back). With the abuse of preboarding, sham seat saving and fact they allow so many to board between groups A and B if I actually paid for Early Bird and got stuck in group B I would be ticked. Assigned seats (which will allow them to charge for more premium ones) is the only option. You may consider that bad for consumers but I think it actually would improve the experience for many.
As for private equity and hedge funds - I've worked with a few and agree they typically load companies with debt and cut costs. However, some costs can be cut without impacting customers. Also, SW has union agreements which would restrict the ability to cut non-management positions. As for employees being "less happy" I could care less - deliver a product I want to buy is all I ask. Isn't my job to worry about employee's happiness.
Tim, you obviously didn't read the presentation at strongersouthwest.com. Southwest has plenty of aircraft, but for some reason they have chosen to not abandon lousy routes and redeploy the aircraft to more profitable routes. The whining about an aircraft shortage is total BS based on Slide 36. A full 12% of Southwest's routes have a load factor below 70%, vs. 3% at American and 1% at United and Delta. My bet is even if they cut half of these low load factor routes and redeployed the aircraft, it would generate significant extra RASM. I really home some analysts grill Southwest management on the next conference call as to why they are clinging to lousey routes? As a Southwest shareholder I fully support Eliot's attempt to fix the airline.
I doubt consumers are that dumb. When you add in the cost of checked bags, Southwest is often competitive. And as you point out, if WN is flying non-stop to where you want to go and all the others require stops in a hub, most people will choose the non-stop - even if it's priced a bit more. Finally, WN dominates some markets with multiple flights per day whereas the competition has only one or none. So frequent fliers can get locked in to WN.
I'm tired of all the greed going on with these activist investors. I't's nothing about what's good for the consumer.
If you start to redesign their aircraft layout and if you start charging for fees for their services then how are they different from other airlines - they become just like them...
This is where everyone learns they added themselves to Google flights as a prequel to removing 2 free checked bags. ✔️
Disagree. Unhappy employees rarely deliver a first rate experience. Your employees are WAS more valuable than your customers. IF you have good employees, they will take care of your customers.
Southwest is still cheaper on many, many ruotes. I'm a tour operator and trust me, their fares are consistently lower, and they are easier to work with. They are also way more responsive when the going gets tough on a particular day. I would love to see reserved seating, even if it's a paid for product.