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Leeham News and Analysis
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- Bjorn’s Corner: Air Transport’s route to 2050. Part 17. April 11, 2025
- Uncertainty plagues airline, aerospace, lessor industries over tariffs April 10, 2025
Pontifications: Southwest’s core problems are not solved by business model changes-yet
By Scott Hamilton
March 19, 2025, © Leeham News: I’ve been reading hand-wringing opinion pieces in recent weeks—especially last week—about the changes at Southwest Airlines.
Beginning with its first layoffs in its 50+ years of 1,700 headquarters staff through last week’s announcement of a series of changes that makes Southwest like just about every other US airline, the woeful crying bemoans the fact that Southwest is, essentially, no longer “Southwest.”
Readers of LNA would have seen nearly a year ago a series of article focusing on the underlying core problems at Southwest. Coincidentally, these appeared before Elliott Management Co. announced it had taken an 11% stake in Southwest, demanding changes in management and its business model to boost profits and stock prices. These and related articles are below.
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- Not keeping up with industry standards crimps unit revenue
- Bloated labor expense, difficult fleet strategy result in uncompetitive cost structure
- Southwest could solve its MAX 7 woes by buying Breeze
- Elliott Management takes 11% share in Southwest, demands leadership overhaul
- Elliott’s plan for Southwest: new governance, curbed costs, monetize passengers
- Southwest slashes capacity growth, shakes up fleet plan
- Southwest meltdown is a day of reckoning
LNA’s analysis by Judson Rollins hit on just about everything Elliott and recent writers and observers complained about, including the sacred cow: Bags Fly Free. Rollins eviscerated the business sense of this benefit in this analysis. Rollins analyzed Southwest’s revenue challenges—and, more importantly, it’s out-of-control costs.
After Southwest’s epic operational meltdown over Christmas in December 2022, I wrote a review of the airline’s long march to this disaster that was decades in the making. I gave up flying Southwest 20 years before that mess for reasons outlined in my review. My column is of special relevance.
I have no sympathy for how the airline got into its predicament, nor for those hand-wringers today.
Bloated workforce
Southwest’s policy of no layoffs was great for employee morale. But job security and management benevolence meant little to increasing wages and benefits at contract time. Over the decades, other legacy US airlines reduced labor expenses through bankruptcies and negotiations. Southwest’s labor unions refused to recognize market realities. As a result, Southwest has the highest labor costs of US airlines as a percentage of expenses, by a wide margin.
When Rollins did his first of two part analyses of Southwest in May 2024, the airline had the fourth highest cost per available seat mile of any US carrier. Only the legacy Big Three, American, Delta and United airlines, were higher.
The handwringers bemoaning that Southwest is now “just another airline” should look at Alaska Airlines. Alaska, which is older than Southwest (it was founded in 1932), had lower CASM and it offers everything (and more) that Southwest is now adopting. Alaska is solidly profitable, investors are happy and now with the acquisition of Hawaiian Airlines, it’s becoming a global carrier.
Alaska is my favorite airline.
Southwest’s business model
As a business flyer, I could care less about Bags Fly Free. I never check my bag. Schedule and price are my top “wants.” Southwest for decades had fallen short on both. Southwest long, long ago de-emphasized schedule frequency. When I lived in Seattle and flew to Chicago to see family or on business, I much prefer Midway Airport to O’Hare. But Southwest had one non-stop flight at a time that didn’t meet my schedule. This wasn’t the only route.
Furthermore, I could get cheaper fares on American, Delta, United and Alaska than on Southwest. Plus I got an assigned seat, and the seat of my choice—sometimes for a fee, sometimes for free. I remember once paying a fee to Southwest for an “A” boarding preference. However, the flight originated in another city. Despite paying this extra fee and boarding in the first group, the only seats left were middle seats.
It was the last time I flew Southwest.
Fleet composition
Southwest flies only Boeing 737s. This was fine for decades. But as Southwest upgauged to the 737-800, succeeded by the MAX 8, turn times exploded with the extra seating, driving down utilization and increasing costs. Smaller cities couldn’t support larger airplanes, to frequency was reduced and some cities pairs were dropped.
Dogmatic adherence to a single fleet type is further harmful with Southwest sticking with the 737-7 MAX. Setting aside all the delays in the MAX program, Boeing hurt the economics of its smallest 737 when it shifted the 7 MAX from a re-engining of the 737-700 to become a shrink of the 737-8. This helped Boeing’s production efficiency. But analysis using Leeham Consulting’s proprietary Aircraft Performance and Cost Model shows that the Airbus A220-300 and Embraer E-195 E2 have lower cash operating costs—more than 10% lower—than the MAX 7.
Each also has somewhat lower capacity. Right sizing the aircraft to properly serve smaller markets is a common industry practice.
Continuous hubs
Southwest also eschews “hubs,” even though it operates several de facto ones. Officials don’t want to schedule true hub operations because this hurt utilization and on bad days can cause delays. But as the legacy airlines know well, you exponentially increase city-pair and revenue potential.
The answer is to create a continuous hub with some many flights that connections are happening throughout the day, without empty ramp space that is a hallmark of traditional hubs.
Bottom line
Southwest’s recently announced changes are necessary but only the tip of the iceberg. Fundamental changes are still needed. These aren’t something to mourn. These are things to revitalize the airline.
‘But analysis using Leeham Consulting’s proprietary Aircraft Performance and Cost Model shows that the Airbus A220-300 and Embraer E-195 E2 have lower cash operating costs—more than 10% lower—than the MAX 7.’
I would suggest that this is more proof that LUV is getting its aircraft from Boeing, for a pittance. Perhaps BA is making it up some, in MRO contracts (if they actually do any work for SWA, in that regard).
Cash costs you only get once, efficiency pays month by month and year by year for as long as you operate that aircraft.
Not necessarily.
Let’s suppose that because they can flex the order muscle and get the lowest price possible of any US carrier, SWA can get an average of $5 million savings, per aircraft.
You take that $5m and put it into the market, as many companies will do – earning a return on investment. Let’s say you have some really savvy guys, who can get you $500k a year, or 10%. Call it $40k a month.
Your fuel savings have to be greater than $40k a month, to start chipping away at the $5mil savings, that the investment earns you.
There is also MRO to consider, but you get the point
That is pretty funny. Anyone that gets 10% return is not going to be working for Southwest very long (both hugely risky and obviously so smart they will cut a wide swatch at Dean Witter etc)
That 5 million is not cut out and invested. It pays dividends, stock buy back – that is quite the imagination there.
They don’t have the -7 though do they?
In the meantime they had a false financial structure that is crumbling.
We have seen the Boeing train wreck coming for many years, prudent management would have worked to a split fleet, certainly after the -7 became a short -8.
And an E2 in the hand is worth vastly more than a non existent -7 let alone the 5 million discount.
Southwest hid their head in the sand convinced how superior they were.
Now its a bloated enterprise and the headwinds are with labor right now so good lucky negotiating sanity back into the ranks.
Again – you missed the point.
Your statement was an absolute – that cash savings are just a one-time thing, while efficiency is forever.
No doubt, things haven’t worked out for SWA. But that is not the point of the exercise, is it?
It was to show you, that if done correctly, cash savings can generate you other sources of income, not just the up front costs.
That’s not really what this means. Cash operating costs should be lower on a smaller aircraft. Those aircraft also carry about 20% less people, so CASM does increase with the smaller jets. The issue that presents itself is filling the additional CoC with revenue. MDW-LAS has no such issue but MDW-DSM may struggle. If higher CoC was always bad everyone would be flying smaller planes and the 767 would be the undisputed wide body king.
You do have to break single aisle out from wide body as wide body costs are a major step higher.
Its the reason AK has rarely had larger aircraft (one 707 leased from Pan Am as I recall). Single aisle costs are so much lower despite multiple crews to fill the same numbers./
https://en.wikipedia.org/wiki/Fuel_economy_in_aircraft#Regional_flights
It all depends
SWA does much less heavy maintenance of aircraft, engines, landing gears and avionics than its size suggest.
I’ve only flown southwest twice (3 total legs), once because I heard good things from what I kindly refer to as “Cultists” and twice because I was forced to due to day of flight cancellations on other airlines and needing to get somewhere on time for work.
each time I hated it. the death match seating model is horrific and stressful. service was poor, 7.5 hour layover in denver was awful, the planes not particularly clean, and the whole experience felt somehow cheaper and lower class than even cattle class on a 30 year old delta regional jet (my previous low bar).
the only good thing was the pretzels (which were really good, Stellar Maui onion pretzels)
Grayhound had its own version of that (don’t know if now)
Each stop was an all new ballgame. If you got off to stretch your legs, then you got in line to board and if more than seats, you got left behind despite having a to the destination ticket to where you were going.
Ungh. Just stayed on the bus close to my seat.
Maybe I am a “cultist” but I loved flying SouthWest from the mid 80’s onwards and only with the very latest changes have I come to the conclusion that there is little difference compared to other major airlines.
Maybe the number one reason I loved them will survive for a little time : the personnel appeared to be very happy to be working for the airline and genuinely happy to have you as a customer. Their safety announcements brightened every day.
The A B and C boarding process made boarding totally without stress, unlike wondering which of 27 boarding groups you were in and having to push through a mass of people crowding the boarding gate.
The original instruction to the crew that they should not close the door until 2 minutes before departure time is such a contrast to airlines like American where they will refuse to let you board 15 minutes before departure time even if the plane is going to sit there for at least 15 minutes!
I loved the peanuts and the speed with which drinks and peanuts were served
The “SouthWest effect “ was so welcome in reducing fares. A couple of times we had friends visiting LA and we made the round-trip from Phoenix just to have dinner with them.
The service from Phoenix to Manchester, New Hampshire allowed us to make more frequent trips to my relative in Boston.
Without knowing specific details, it always seems that their seat pitch is slightly better than other airlines. As far as cleanliness is concerned, the leather seats on Southwest always looked better than dirty cloth seats on other airlines.
I really miss what was Southwest
My family always defaulted to Southwest. The new bag policy means that they have lost that loyalty.
I fly Southwest often enough to comment on several things. This is an airline still flying as if it is the 90s. Its load factor is about 80%…there are many full routes but many dead routes. It is addicted to 737-700 and Max7…not because of the best operational parameters but because Boeing offered rock-bottom prices.
People can harp on the bags policy but I will say this. I am smart enough to calculate the cost of a trip paying for bags on other airlines and I am smart enough to do the same where it was included on Southwest. Axing the bags policy can work so long as the baseline fare are competitive. Right now…they are not.
I see two elements to the new strategy…cutting labor costs (they have already cut overhead). The first real battle is when they go to war with their unions over competitive pay.
The other is addressing revenue. Southwet’s load factor will indicate that the revenue problem was not in charging enough for its product but by not selling enough seats. Charging more by offering less ususally does not end well when your fundamental problem is lack of sales. Southwest occupied a weird market position between catering to business travelers and and leisure travelers. The new pricing structures (along with points and fare categories) will indicate a pivot toward becoming more like Delta and American than Frontier or Avelo. The risk to Southwest is that its customers take a look at the new Southwest and simply take their business to either Delta and American or Frontier and Avelo.
Cutting labor costs now is an impossible deal, they are in for a rough time.
IMHO- very simplistic- what happened to SW was the same thing that happened teo Boeing
” When I say I changed the culture of Boeing, that was the intent, so it’s run like a business rather than a great engineering firm. It is a great engineering firm, but people invest in a company because they want to make money. ”
Harry Stonecipher, 2004, former CEO of The Boeing Company, reflecting on the late 1990s
Only the proponents name need be changed look closely at bored of directionless of SW and insert names in the above
It’ll be interesting to see how things go at Southwest.
Thanks for this article.
Midly. Mostly I am interested in aircraft choices
when you do a flight cost comparison when flying for vacation between Southwest, AA and Delta to popular destinations (e.g. Florida) Southwest prime time slots are just as or more than the competition (unless you are going off times and thru 3 cities which takes 10 hours for a typical 3 hour flight)
Having never flown Southwest, other than having see its distinct colored planes at airports, kind of a shrug. It never was on a route I needed or wanted to take. I did follow its battles to break out of Texas and also had no issues with them, just another operation though they made money when others did not.
Not being a Business person, I do take a bag so bag costs are a factor but not the only one. I quit flying at night (red-eye) when I realized that the night costs were the same as daylight costs. Happy to leave at a sane hour and get someplace at a sane hour and not spend the next day recovering.
Elliott is a version of corporate raider, buy at low, juice up the company sell the stock. Mentour pilot did a great video on it and you see them pop up in other business. Not something I would want to be a part of.
Southwest is a lot like Boeing. What comes out of Southwest, kind of shrug.
I won’t say Alaska is a favorite, for me its anyone that is going in my direction at the best price. Flying was exciting back in the 50s through the 70s. Now its just survive the trip in packed airplanes and airports.
First time in a jet aka a DC-8, that was a thrill and the lap of luxury even in cattle class. Huge wow. And man did that thing go up like a rocket. No 1.5 hours to reach cruising altitude.
I appreciate Scott mentions the E2-195 in the context of SW (yea I know). An efficient E2 in the hand vs a heavy -7, hmmm. The single bird mantra does not apply if that bird is not efficient and other costs factor in.
Clearly Southwest has the routes that would benefit from an efficient in its class aircraft. E2 can be had, A220 harder to get.
@TW
There was a time when what SWA tried to offer was unique. Southwest thrived when it hedged fuel when they could, entered “fortress cities” held by the large mainline carriers and generally was the only discount airline in a city.
Avelo, Allegiant, Breeze, Frontier, Spirit, Sun Country and JetBlue all offer the same crappy experience now. In many cases, some of the diversion is from those airlines entering markets SWA never bothered to enter. Too many wolves to feed. When your product is a commodity, the only thing that matters otherwise is cost basis. Most of those airlines run on a shoestring labor basis.
25 years ago, Ryanair allegedly modelled itself on Southwest.
Since then, Ryanair has evolved, and is now the biggest airline in Europe.
Perhaps it’s now time for Southwest to model itself on Ryanair?
AirAsia has a similar model to Ryanair, and is also phenomenally successful.
Key aspects of that model:
* 25-minute turnaround time.
* Cut fares so as to ensure full planes.
* Don’t forget regional airports that are unloved by others.
—
Why all the fuss about paying for checked-in bags? That’s standard among (most) airlines in Europe and Asia.
Last time I flew internationally- on Swiss Int’l- the fee was $100 per checked bag. Yikes.
Wow. Been a lot of years since I did any IH flying.
Don’t see it starting now!
I think aviation industry insiders discount how much ordinary human beings loathe the nickel-and-dime fee structure that airlines have “perfected” (in the sense of the evil Star Trek alternate universe) over the last 30 years. Fees for luggage, fees to ensure you have a seat (!), fees to pay for a drink, fees to use the toilet, fees on fees… It makes sense from the perspective of businesses trying to create localized monopolies and then milk, I’m sorry, capture the “surplus” under the demand curve (ie. the customer’s bank balance) but it drives humans who aren’t shielded by powerful corporate travel agencies or deep personal knowledge of how to get around that timesuck absolutely insane.
Granting all the operational issues Southwest has had since ~2015 they nonetheless presented a clean clear fare structure to their customers and backed it up with actual helpful customer service. Now all that is gone, swept away in favor of… what? The tell will be how fast Elliott dumps their stake.
+1
I think a lot of ‘ordinary’ fare buying customers are very happy to have very low base fares and the ability to choose what level of service (seats, meals, pillows, etc) they want to pay for. Fares would be much, much higher under the old “one size fits all” structure.
just the start of airline downturn…
“Air Canada, has reduced flights to the U.S., including Florida, in response to lower demand caused by ongoing trade conflicts initiated by the United States.”
“Speaking during the J.P. Morgan Industrials Conference on March 11, Scott Kirby, the Chief Executive Officer (CEO) of United Airlines , admitted that there has already been a “big drop” in terms of demand to fly from Canada to the US.”
It takes a real talent to wreck a system running nicely!
Who wants to go to a place, where the leader calls you a nasty country and an enemy, while praising Russia?
That said, now extend that to the EU and other countries being slapped with US tariffs….is there going to be downturn in the US tourism industry?
There are so many options for tourism which don’t include US destinations. Visiting friends and relatives traffic will likely stay strong, but discretionary travel for holiday will continue to drop.
“Shall we holiday in America or elsewhere this year?” Hmm, let’s skip the places where their leaders call us names, threaten our borders, refuse to support their treaty obligations, etc.”
Pretty easy decision.
from Richard Aboulafia March 17, 2025
https://richardaboulafia.com/march-2025-letter
“The economy is getting hit hard, and in serious danger. All of the administration’s initiatives so far create the perfect conditions for a self-inflicted recession (perfect summary here). The S&P 500 has somehow lost $5 trillion over the last three weeks. Layoffs are up, consumer confidence is down, and preliminary GDP numbers are terrible. Worse, tariffs (real and threatened) and economic uncertainty increase the likelihood of longer-term stagflation and general malaise. A planned government cryptocurrency purchase scheme will create a nasty investment bubble which will one day burst.
Industry impact: Airline guidance is falling and will likely fall faster. So will corporate profits, impacting business jet demand. Higher inflation and interest rates, and tariffs and retaliatory tariffs, will all weigh against US industry competitiveness (great tariffs overview here). Inflation, higher interest rates, tariffs, and retaliatory tariffs will also clobber an already fragile industry supply chain. In the longer run slashed scientific and research funding will also hurt the industry.”
And the reduced values will make it even easier for corporations to be stolen by oligarchs. That is the only reason I can see for all of this to be happening. Drastic reduction of government services will allow oligarchs to swoop in to privatize those services and next to nothing. Alternating threats of tariffs and wars cause market volatility that oligarchs can take advantage of thanks to advance notice from the administration. And through it all the sociopaths are being celebrated as freedom fighters.
Good call, I think.
@David
It’s not only the tariffs, the USTR has proposed to levy port fees. Fun time begins soon if it all goes according to their plan.
https://linkedin.com/pulse/ursablog-biting-hand-feeds-simon-ward-ouarf/
https://pbs.twimg.com/media/GmafR4LWYAAsAXO?format=png&name=large
https://pbs.twimg.com/media/GmafR4IXcAA1nDb?format=png&name=large
“European Countries Issue Travel Warnings for U.S. Over Trump’s Crackdown”
“Germany tightens travel advice to US after three citizens detained”
“UK issues travel warning for US”
“Canadian lawmaker Charlie Angus issued a dire warning to his fellow citizens: “I urge people not to travel to the United States”
this will change airline traffic to the US…..
just a fyi…Google AI “In 2023, Disney World welcomed 6.13 million international visitors, with Canada remaining the top international market with 1.3 million visitors, followed by the United Kingdom with 900,000″
Google AI”While Walt Disney World doesn’t publicly release specific visitor demographics, estimates suggest that international visitors account for roughly 18-22% of all guest”
Trump awards Boeing much-needed win with fighter jet contract, sources say
“The engineering and manufacturing development contract is worth more than $20 billion. The winner will eventually receive hundreds of billions of dollars in orders over the contract’s multi-decade lifetime.”
that’s special, Boeing can’t get a trainer done on time “T-7 trainer production delayed again as Air Force”
hmmm can’t tanker on time or the T-7 trainer…by the time Boeing delivers the first production model the Chinese will be flying their prototype 7th generation fighter
well the 9101 bldg across from museum of flight has sufficient autoclave size and probably still has n/c routers and n/c tape layup machines ( or at least reinstall new ones ) avail to handle most of the larger parts of the p74 based on the limited views I’ve seen. Been there since the b2 program which built/layup/autoclave most of the body and major sections of the wing and ‘ bomb bay ‘ sections. Office areas and such have room for major computer and all conncected via fiber optics ( this since early 80’s )
But most all of the experienced design and manufacturing types have long since retired or passed on. And great experience on lightning protection may have likewise disintegrated. ( military requirements are much stiffer than commercial ). But OTOH the P-8 Posiden was for a while largely fitted out just down the street and a lot of that experience should still be available. So just maybe – perhaps -they wont fubar the new plane ?
My oopsie …” handle most of the larger parts of the p74 based on the limited views I’ve seen.”””
S/B F47 designation – I wuz trying to avoid confusion with the old P47 of ww2 and did NOT closely check the news article. 2nd mistake this year . .
get the 47 right…aircraft designated for Trump…47th president
but it was started when he was 46th- and supposedly to honor the ww2 P 47. In either case and IMHO- they wanted to avoid the designation of bomber- especially when you consider its been years since a real dogfight what with medium range missiles, etc.
VIDEO: Installing the world’s largest thermoplastic composites press at Airbus Bremen
https://www.compositesworld.com/articles/video-installing-the-worlds-largest-thermoplastic-composites-press-at-airbus-bremen