Subscription Required
By Chris Sloan
Sept. 30, 2024, © Leeham News: Southwest Airlines outlined significant moves in its quest to return to sustained profitability at its investor day on September 26 in Dallas. Widely reported revenue and financial initiatives include assigned and premium seating, network realignment, capacity growth cuts, and staffing reductions.
Billed as Southwest Even Better, the plan is the most transformational program in the company’s 53-year history, according to Chief Executive Officer Bob Jordan. “The plan includes a robust set of tactical and strategic initiatives and elements uniquely available only to Southwest Airlines. The plan is capital efficient and supports achieving our financial goal of ROIC [Return on Invested Capital], well above our cost of capital,” he said. Yet, he acknowledged that recent financial performance is not up to anyone’s expectations. “Our model is not broken, but it needs continued calibration and enhancement.” By 2027, the plan is expected to add approximately $4 bn in cumulative incremental earnings before interest and taxes (EBIT).
Jordan pointed to external factors as a significant culprit, notably Boeing. “It’s no secret that Boeing’s delivery delays have created significant issues for us, making it very difficult for us to run a business. Boeing has delivered very few MAX aircraft on time, and we are still waiting on the MAX 7 certification.” Though compensation agreements remain confidential, “Past financial issues caused by Boeing delivery delays and other Boeing issues have largely been resolved through the application of credits on future deliveries,” said Jordan.
Southwest is taking dramatic steps to mitigate “operational risk” by reducing hiring and cutting annual capacity growth to 1-2 percent through 2027. “We expect production issues at Boeing and issues related to the (Pratt & Whitney) Geared Turbofan engine to continue to constrain industry growth for years to come,” Jordan noted.
Subscription Required
By Judson Rollins
June 13, 2024, © Leeham News: Elliott Investment Management announced an activist shareholder campaign against Southwest Airlines’ board and management earlier this week.
The airline’s share price has declined 50 percent in three years and sits near its April 2020 value, one month into the COVID-19 pandemic. Elliott says this is due to poor board governance and day-to-day management.
“Southwest’s [board] has failed to hold management accountable for poor execution and has been unable to catalyze (or permit) the necessary strategic evolution,” Elliott wrote in a letter to the Southwest board.
Related Stories
“Instead, the [board] has reinforced an insular culture and outdated thinking in the face of indisputable evidence that change is required.”
To gain a deeper insight into Elliott’s proposed ‘Stronger Southwest’ plan, LNA studied the firm’s letter and accompanying presentation and spoke with sources familiar with the situation.
By Judson Rollins
June 10, 2024, © Leeham News: Hedge fund Elliott Investment Management announced yesterday that it has a $1.9bn position in Southwest Airlines, comprising 11% of the company’s shares. It issued a letter to the airline’s board, calling for new directors, a new CEO, more executives from outside, and a comprehensive business review.
In its letter, Elliott wrote, “While Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with a strategy that no longer succeeds in the modern airline industry.”
The announcement came as Southwest’s stock price remains near its April 2020 value, and management faces growing questions about excessive costs and middling unit revenue.
Elliott included with its letter a 51-slide presentation laying out its case for overhauling Southwest. One slide features a 2014 quote from founder and former CEO Herb Kelleher: “If things change faster outside your company than they change inside your company, you’ve got something to worry about.” Read more
Subscription Required
By Judson Rollins
May 20, 2024, © Leeham News: Southwest Airlines was founded on the principles of high employee productivity and low labor costs. But 53 years after beginning operations, its labor cost as a percentage of expenses — and per seat-mile — is now the highest among US airlines.
LNA studied Southwest’s and its US competitors’ 2023 annual reports to comprehensively understand their relative profitability. The resulting picture is less than flattering to the Dallas-based carrier. Southwest is increasingly a “legacy LCC,” with LCC-like unit revenue but a legacy cost structure.
Subscription Required
By Judson Rollins
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.
Subscription Required
By Judson Rollins
May 6, 2024, © Leeham News: Southwest Airlines, still awaiting the certification and delivery of the Boeing 737 MAX 7 as a replacement for its aging 737-700s, might have an unorthodox alternative: acquire startup Breeze Airways for its Airbus A220 fleet – and, more importantly, its order book.
Launched in 2021 by serial airline entrepreneur David Neeleman, Breeze operates 23 A220-300s, 10 Embraer E190s, and six E195s to 47 airports across the US. It focuses on connecting larger airports to smaller cities, including a handful of transcontinental routes.
Ironically, the Utah-based airline achieved its first-ever monthly operating profit in March. It recently announced plans to operate the A220 exclusively by the end of this year.
According to a January update from database provider Cirium, Breeze has between 11 and 13 A220s scheduled for delivery each year through 2028. No options are listed.
Market intelligence says Airbus Commercial Aircraft CEO Christian Scherer visited with Southwest executives in Dallas and Breeze leadership near Salt Lake City in mid-April. This was well after Breeze’s February order for 10 additional A220s.
Jan. 3, 2023, © Leeham News: I’ve been employed by, consulting, or writing about the airline industry for 43 years.
I’ve seen plenty of times when flights were disrupted. There was 9/11, in which the US skies were closed for four days. It was a first. The COVID pandemic essentially shut down global traffic for months, another first. I’ve seen 40% of the US capacity operating in bankruptcy following the 1991 Persian Gulf War. There was SARS. The hijacking epidemic in the 1970s. The Palestine Liberation Organization hijacked four airliners at once and blew them up in the desert, fortunately having let passengers and crew deplane first.
See airport chaos:
But never have I seen the chaotic meltdown of an airline like that seen during the Christmas period of Southwest Airlines. On Boxing Day, the Luv airline canceled two-thirds of its flights. Its hubs in places like Baltimore and Chicago Midway were a sea of humanity and baggage. Southwest’s meltdown was simply unbelievable.
Yet, somehow, I wasn’t terribly surprised.
I’ve been watching Southwest for nearly five decades. I gave up flying it probably close to 20 years ago, even though I love Midway Airport (I still have family in the Chicago suburbs). Southwest has been on a long, long, long road to implosion for years.
Here’s why.
By the Leeham News Team
March 29, 2021, © Leeham News: Southwest Airlines today announced an order for 100 Boeing 737-7 MAXes.
The order was expected. The carrier also considered the Airbus A220-300. But any prospect of diverging from the 50-year relationship with Boeing was at best a crapshoot.
Despite the flowering language in the press release, the key reasons are buried.
Subscription Required
By Scott Hamilton
March 22, 2021, © Leeham News: Airbus lost an order from Alaska Airlines, which means the carrier will essentially revert to an all-Boeing fleet.
Alaska Airlines ordered more Boeing 737 MAXes instead of Airbus A321neos. Southwest Airlines appears ready to order the 737-7 MAX instead of Airbus A220-300s. Were these real opportunities? Photo by Boeing.
And despite the apparent high-profile loss of a potential order from Boeing loyalist Southwest Airlines, Airbus is holding its ground in the USA.
Did Airbus miss opportunities to gain ground?
It all depends on how you look at it.
Heard on the Ramp
We introduce today a new feature, Heard on the Ramp. This column contains news briefs LNA picks up in the market that aren’t expansive enough for stand-alone articles but which are items of interest. Publication will be on an as-needed basis.
By the Leeham News staff
March 10, 2020, © Leeham News: Last year revealed Boeing 777X order problems, with a small customer base and cancellations or deferrals. Perhaps this year will be the Airbus A330neo’s turn.
Out of 337 orders, 156 A330neos are with airlines in trouble or can’t take aircraft (AirAsiaX, Iran Air, HNA), or 46%.
This is without counting the second level of trouble airlines and lessor orders, which may have challenges placing aircraft in today’s unsettled market.