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A Boeing 737-700 in Southwest livery.
The latest chapter in the book of change at U.S. carrier Southwest Airlines has been written. How will the story end?
Developments so far in Southwest’s transition include a three-year plan to cut costs, restrain growth and offer customer products more in line with those that other U.S. majors provide, such as assigned seating and cabin sections with more legroom. Whether making Southwest more like a regular airline will attract more passengers and bring greater profitability is a hoped-for conclusion yet to be turned into a cliffhanger finale. But the story of how Southwest went from there to here is already a page-turner.
From the start, Southwest’s tale has been one of America’s great adventure stories. There was the huge, crowd-pleasing personality of co-founder and long-time CEO Herb Kelleher. He and Texan businessman Rollin King may have dismissed the oft-told tale of how they developed a plan to create a different type of airline on a bar cocktail napkin, but Kelleher was always happy to play to other legends: the Wild Turkey, Harley-Davidson bikes, arm-wrestling matches, hugs and company get-togethers that seemed more like rock festivals.
Underneath it all, however, Kelleher was a sharp lawyer and ruthless businessman. He needed to be just to get Southwest off the ground. Air Southwest Co. was established in 1967, but it did not launch flights until June 1971 because of legal challenges from competitors that went all the way to the U.S. Supreme Court. Then, operating as Southwest Airlines, it began flights from Dallas Love Field to just two cities—San Antonio and Houston. That both were in Texas was no coincidence. The Wright Amendment law, introduced to stifle passenger air service at downtown Love Field and encourage growth at the new Dallas-Fort Worth International Airport, hemmed in Southwest. But workarounds were found, and legal challenges continued until some restrictions were lifted in 2005 and the entire amendment died in 2014.
In the meantime, Southwest had grown to become a massive airline. From a domestic, point-to-point carrier with simple, unconventional practices that allowed it to deliver short gate turnarounds and high aircraft utilization, it has turned into a U.S. major operating some 4,000 daily flights from 120 airports in 11 countries with an all-Boeing fleet of more than 800 737s, including 233 MAX-8s. Southwest was the launch customer for the 737-300, -500, -700 and MAX-8. In the ultimate of conventional business moves, Southwest’s stock was listed in 1977 on the New York Stock Exchange under the ticker symbol LUV—a moniker Kelleher and the company embraced.
Other “conventional” airline moves happened under the leadership of Gary Kelly, who succeeded Kelleher. The company joined the industry’s enthusiasm for mergers and consolidation, acquiring Air Tran Airways, which took it into international territory with services to the Caribbean and Mexico. Service to Hawaii began in 2019 and ramped up, giving Hawaiian Airlines a run for its money. Unlike other airlines, however, Southwest could claim an unmatched 47 consecutive years of profitability, until the pandemic year of 2020, with not a single employee layoff.
Southwest management has long touted these accomplishments, but also insisted they were not as important as maintaining its core values and people-centric culture. Current CEO Bob Jordan puts it this way: “The biggest thing that makes us ‘us’ is our People, and the unique and unrivaled Hospitality they deliver. No one has a Heart for service like the People of Southwest Airlines. No one.” The caps are his.
Which brings us to the most interesting question raised by the latest chapter in Southwest’s history: how will it maintain that “us” culture while delivering on new shareholder demands for greater profitability? Most vocal among these has been Elliott Investment Management, a large U.S. activist fund which in June took a $1.9 billion stake in Southwest and sought to oust Jordan and other Southwest senior management, claiming the company had “failed to evolve.”
Much head-butting ensued, with Southwest management circling the wagons and Kelly agreeing to step down early as board chair from Nov. 1 (he retains a board emeritus chair title)—a move largely viewed as given in return for Jordan staying on as CEO. In other board changes, Rakesh Gangwal becomes independent board chair. Gangwal, who was a co-founder of Indian LCC IndiGo, has called on a re-formed board to “work closely with Bob Jordan” and said they would embark on “the next era of change at Southwest as we build upon its many successes and storied past.”
Those board members include Lisa Atherton (compensation committee chair); Douglas Brooks (audit committee chair); Chris Reynolds (nominating and corporate governance committee chair); and former Canadian LCC WestJet CEO Gregg Saretsky (finance committee chair). Southwest says Saretsky is the only Elliott-nominated director, and that David Hess will continue to chair the safety and operations committee.
Southwest, meanwhile, reported its 2024 third-quarter results, posting record operating revenues for the quarter of $6.9 billion and net income of $67 million. Liquidity stood at $10.4 billion, well in excess of its $8 billion debt.
“We are laser-focused on delivering the robust set of tactical and strategic initiatives included in our plan and returning to the strong financial performance we expect. Our third-quarter profit and strong operational results are reflective of the actions we are taking to deliver our plan and achieve our North Star goal of ROIC of at least 15%,” Jordan said.
Whether this tale turns into a romance, thriller or horror story may depend on whether Elliott allows Southwest to do what it does best: be Southwest.
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