Elliott’s plan for Southwest: new governance, curbed costs, monetize passengers

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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.

Source: Elliott Investment 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.


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“Instead, the [board] has reinforced an insular culture and outdated thinking in the face of indisputable evidence that change is required.”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.

Summary
  • Elliott blames subpar returns on insular, stagnant board and management.
  • Keys to restored profitability include curbing cost growth, passenger monetization.
  • New board, CEO with industry experience would drive business change.
  • Employee resistance is a likely headwind; will improved profit sharing help?

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Elliott takes 11% share in Southwest, demands leadership overhaul

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.”

Source: Elliott Investment Management.

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

Southwest, the “legacy LCC,” part 2: Bloated labor expense, difficult fleet strategy result in uncompetitive cost structure

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By Judson Rollins

Introduction

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.

Boeing 737 MAXes parked after the 2019 MAX grounding. Source: Getty Images via AFP.

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.

Summary
  • Labor costs are dramatically worse than legacy or LCC competitors.
  • Fleet and route strategy are crimped by overreliance on the Boeing 737.
  • Southwest’s insular management team and culture may be its greatest obstacle to business model innovation and continued profitability.

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Southwest, the “legacy LCC,” part 1: Not keeping up with industry standards crimps unit revenue

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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.

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Southwest could solve its MAX 7 woes … by buying Breeze?

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By Judson Rollins

Introduction 

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.

Source: Orlando International Airport via Simple Flying.

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.

Summary
  • To deliver or not to deliver the MAX 7?
  • Southwest’s aging 737-700 fleet has few replacement options
  • How a Breeze acquisition might play out
  • Azorra Aviation is likely a key partner in helping Southwest get A220s

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Pontifications: Southwest meltdown (its second in 3 months) is a day of reckoning; what will it do to fix it?

Jan. 3, 2023, © Leeham News: I’ve been employed by, consulting, or writing about the airline industry for 43 years.

By Scott Hamilton

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.

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HOTR: Compensation wins Southwest order for MAX

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.

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Did Airbus miss opportunities with Alaska, Southwest?

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By Scott Hamilton

Introduction

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.

Summary
  • Alaska Airlines chose to eliminate the Airbus A319s and A320s inherited with the 2016 acquisition of Virgin America. It’s not going to retain the orders for A320neos. And it passed on ordering more A321neos when it recently placed a follow-on order for Boeing 737-9s.
  • It looks all but sure Southwest Airlines will pass on ordering the Airbus A220-300 for its sub-150-seat fleet requirement. Boeing looks poised to win a big order from Southwest for the slow-selling 737-7 MAX.
  • Neither outcome, however, was unexpected.

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Heard on the Ramp: Boeing has its 777X sales challenges; Airbus A330neo appears to be next

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.

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Pontifications: Southwest to evaluate splitting airplane supplier next year

Oct. 28, 2019, © Leeham News: Gary Kelly, the chairman of Southwest Airlines, told CNBC Thursday that next year, the company will review whether to source airplanes from another manufacturer besides Boeing.

This, of course, means Airbus.

The prolonged grounding of the Boeing 737 MAX is the reason. Southwest says the grounding already has cost nearly $500m in lost revenues.

Kelly said the analysis won’t be for “smaller” airplanes, but he didn’t specify to CNBC what this means.

Southwest has 500 Boeing 737-700s seating 143 passengers at 30-31 inch pitch.

The Airbus A220-300 seats 145 at 32 inches in the Air Baltic one-class configuration.

The Embraer E195-E2 seats 146 passengers, but in a 28-inch pitch. At Southwest’s preferred 31-32 inch pitch, the E-Jet seats 132 passengers.

Since the context was the 737-8 MAX, did Kelly mean, not smaller than the -8? This isn’t known.

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