Subscription Required

By Judson Rollins

Introduction 

May 13, 2023, © Leeham News: Southwest Airlines, previously a longtime darling of investors and leisure passengers alike, struggles to find its footing now that the post-covid US domestic market is returning to normal.

"Bags fly free" is more headache than help for Southwest as it tries to grow unit revenue. Source: Forbes.

The airline eked out a 0.8% operating margin in 2023 and fell to -6.2% in the first quarter of 2024. Investors have lost faith in the company’s ability to return to its previously strong margins.

Southwest “is now a ‘show-me’ [investment],” airline analyst Helane Becker of Cowen recently told investors. “We expect shares to trade in a narrow range until they can return to sustainable profitability and at least high single-digit operating margins.”

After a deep dive into the airline’s cost and revenue performance, LNA believes the company is in a strategic quandary with few ways to offset rapidly rising labor, maintenance, and fuel costs. In short, Southwest is increasingly a “legacy LCC,” with LCC-like unit revenue but a legacy cost structure.

Summary

• The airline struggles to achieve innovations widely implemented elsewhere.
• Unit revenue is comparable to low-cost competitors, but a leisure-oriented network, product, and passenger experience leave little opportunity to increase it.
• Underinvestment in IT and onboard product reduces Southwest’s reliability and alienates much-needed high-yield passengers.