Is There a Reason to Choose Southwest Anymore?
if it becomes exactly like the rest, what will keep Southwest from becoming the worst?
Dear readers,
If you haven’t heard the news, it’s the end of the ‘bags fly free’ era at Southwest.
CEO Bob Jordan announced today at the J.P. Morgan Industrials Conference that in addition to fees for checked baggage, the airline will roll out basic economy tickets and sunset its never-expiring flight credits. Southwest will also overhaul its miles program “to both better align earn rates to fare paid,” and to introduce “dynamically optimized redemption rates,” Jordan said.
At the conference, Jordan appeared optimistic and he expressed confidence in the plan — well, what else can you do when an activist investor and the board has both hands firmly on the reins of the company you run and you apparently want to keep your job? But I wonder how much Jordan believes it. I find this next quote from him really telling.
“It's also important to note that while all of these initiatives are new to Southwest, they are not new to the industry,” Jordan said. “That adds additional confidence in the ability to execute as planned and in achieving the financial targets that are laid out.”
Of course, this is exactly the kind of pitch you make to analysts and investors, rather than customers. And while I am way more respectful of investors than the average journalist (they own the company after all), I fear Southwest could be making a major mistake. Let’s face it: the customer experience on this airline kind of sucks compared to the competition, and I don’t think stuff like assigned seating is going to materially change that. Southwest typically has retained its loyal following not by making the travel process more comfortable, but by giving passengers more value through liberal policies and fewer fees. I hate clichés, but I admit that Southwest has done a better job than other airlines at putting the customer at the center of everything it does — so much so that the airline insists on capitalizing the C in “customers.”
And now it’s going to throw it all away, by being just like every other airline. Except it won’t be just like every other airline, because its product is worse!
Where’s the value proposition?
Think about the choice Southwest customers will face just a few months from now. On Google Flights or Expedia, where people can now track Southwest fares, customers probably will see that their favorite airline is posting a fare that matches the rest, because that’s how industry pricing works. If Southwest doesn’t win on price, what other factors might a customer consider? They might remember a few recent changes at the airline that all add up to there not being much that’s special about Southwest anymore:
Oh wait… but now that fare doesn’t include my two checked bags…
…and I can’t set an alarm on my phone for when check-in opens to try to make the ‘A’ boarding group and snag an aisle seat up front for no charge.
And it also doesn’t include in-seat screens…or free WiFi…or hot food for sale…or a chance to upgrade to first class with cash, or miles, or just at the last second for free as an elite frequent flyer.
And there’s no airline club to access (either with a membership card or for a one-time fee) if there’s an unexpected delay…
….so this is basically Southwest offering me a worse experience in almost every way that matters.
If I haven’t already made this clear: with this announcement, Southwest will complete its transformation to be — paradoxically — not only the same as every other airline, but worse.
Welcome to ‘commodity flying’
As I’ve written about extensively, I’m glad Elliott Management and the new board shook things up, because I think Southwest had become a bloated mess that was incapable of advancing with the times. I’m sure Elliott and the board think that today’s announcement is just another step in that process. But instead of congratulating them, I can only say: Welcome to commodity flying, Southwest.
Elliott and the board must be salivating over the revenue that bag fees will produce, and the buy-up opportunities from basic economy. They probably even think they can get nice breakage from altering the travel credit policy even though when Southwest introduced credits that don’t expire in mid-2022, CFO Tammy Romo assured us that there will be no material effect to breakage levels after the first few months.
But none of this will work the way Elliott wants it to if Southwest cannot attract people to its airplanes. And the best way to do that in today’s climate — as United and Delta have shown — is to create an onboard and airport product that people want to choose. Now I ask: all things equal, what’s the reason to pick Southwest?
This came up at the J.P. Morgan conference, when Scott Kirby and Glen Hauenstein gleefully weighed in. Kirby acknowledged that the bag fee move makes financial sense for Southwest, but he also stressed that the airline may struggle to retain passengers against United and other airlines. “The relative margins will be worse in competitive markets because it will cause some customers at the margins to switch to competing airlines,” Kirby said.
Meanwhile, Hauenstein said some Southwest changes could help it improve its share, because some customers do not like free-for-all seating or lack of extra-legroom options. But he also said Southwest could lose customers when they learn they have to pay to check bags. “Clearly, there are some customers who chose them because of that,” Hauenstein said. “And now those customers are up for grabs.”
As I see it, Southwest now only has one true moat — the point-to-point network with strength in mid-size cities. It’s true: if you need to go from St. Louis to Nashville, I’m sure you’ll still opt for Southwest. But what if you need to go from St. Louis to Los Angeles or San Francisco or Seattle?
We saw American get this wrong after the pandemic. Former chief commercial officer Vasu Raja argued that American’s network and frequent flyer program were enough of a differentiator against United and Delta that American didn’t have to invest in product in the same way as the others. Consumers, he said, naturally would choose American because it could connect the most cities. Does anyone recall how that went for American?1
It’s been even worse for discount carriers that have treated air travel as a commodity. Frontier and Spirit have had an awful time attracting customers except during peak periods. Both ULCCs still will have a more punitive product than Southwest after this overhaul, but the chasm will be smaller than it was.
With the possible exception of in-flight crews (some of whom take a more playful approach than those on other carriers), I don’t think there’s anything special about Southwest’s in-cabin experience. I also don’t think this will change much once the airline finishes its retrofit program and adds in-seat power and extra-legroom seats, because that’s more about keeping up with the competition than real differentiation.
I feel bad for Southwest management
I’ve seen this narrative about how Southwest management missed a bunch of trends and is responsible for the airline’s underperformance today. I think part of that is true, and former CEO Gary Kelly deserves a big part of the blame. Under his watch, Southwest coasted to big profits but didn’t invest in itself to remain competitive. Internally, Southwest did itself no favors in keeping top executives comfortable and stagnant, essentially ensuring the airline would be temporarily comfortable and terminally stagnant.
But now what’s clear to me is that the current management team spent a lot of time trying to make the best out of what it had been given. I think this group understood that free bags and credits that don’t expire and no basic economy were all things that possibly contributed to the airline’s economic performance after Covid, rather than things that detracted from it. These executives were adamant that customers were choosing Southwest because it treated them better. Remember, Southwest has been making money, just not as much as in the past.
Ryan Green, the outgoing chief transformation officer, fought the good fight.2 In September at Southwest’s investor day, he stressed that his team's math did not support checked bag fees, because people chose Southwest for that policy, just as they opt for Delta or JetBlue for the free WiFi, or United and Delta for the in-seat screens. Jordan backed him up, telling analysts that bag fees would cause more harm than good.
"Our policy not only provides customer value and generates enduring loyalty, the policy also generates significant shareholder value, and there is significant customer and financial risk to eliminating or changing the policy," Jordan said in September.
COO Andrew Watterson had similar things to say in the past about basic economy, a product Southwest now says it needs. On the second quarter 2022 earnings call, Watterson (then the chief commercial officer) said Southwest wanted to be different from competitors who prefer a "smash grab, like a basic economy or something like that.” Watterson added that “people remember when they weren't treated well.”3
I think this leaves exposed the real tension between Elliott Management and Southwest’s leadership — and in the course of this takeover, the real apparent failure of Southwest’s leadership to defend what was worth defending about this airline. Southwest fought hard to keep a lot of things the same over the years: its ‘we’re not like the rest’ approach to fees, its stable jobs, its internal culture, its customer perks. But if you fight to keep everything, you stand to lose everything.
And that’s what’s happening now.
How much longer is Bob Jordan going to do this?
I’ve never worked in corporate America, and I’ve never made as much money as Southwest’s top executives. But I’m amused by how hard Jordan seems to be trying to keep his job.
He and his team had a plan to change with the times, while keeping a few things that still would attract customers and differentiate the airline. And now, apparently, the airline’s board has said, ‘nah: we’re going to do it another way.’ And Jordan seems content to be the public face of it all.
It’s all become a bit of a farce. Jordan is a nice guy, but at this point, it's pretty obvious that he's not calling the shots. Does he really want to stay? And even if he does, does he have any power?
His comments about bag fees at Tuesday’s conference suggest to me that he’s not in charge. First, he told investors that Southwest changed its policy because “actual customer booking behavior through our new booking channels, such as metasearch, did not show that we are getting the same benefit from our bundled offering with free bags, which has led us to update the assumptions.” That’s a decent-enough explanation, I guess, though I’d like to learn more about that math, especially since his own team was countering that with other data just six months ago.
But then he shared the second half of the rationale — that the board has a lot of people on it who worked at other airlines that have bag fees. This quote makes it sound to me that Southwest really made the changes because some board members had a gut feeling that they would work.
“We've also benefited from the additional experience of leaders that have direct experience implementing bag fees at multiple airlines, and that also helped further validate the new assumptions,” Jordan said.
“New assumptions”? What a tell.
That’s all for today. I’ll be back soon with some thoughts on the U.S. demand situation. At the J.P. Morgan conference, several airlines reported a softening in demand in February and March. It’s certainly not good, but honestly I expected worse given the current political and economic climate in the United States.
On the bright side, at least Southwest isn’t firing its best corporate customers.
In my last story about Southwest, I insinuated that Green might have been caught up in Southwest’s cost cutting and perhaps didn’t leave on his own accord. After I wrote that story, I heard from a source who said I might have been a little harsh. This person said Green “pulled the parachute” after deciding he’d had enough following a 23-year career at the airline.
I pulled up that earnings call because that’s when Southwest executives first discussed their travel credit expiration policy in detail. You may not remember, but this travel credit change was a thing. The airline came up with it in mid-2022, not long after the rest of the industry took away a major Southwest competitive advantage (no change fees). Southwest sought a new advantage, making its credits far more useful for leisure customers, who would reward the airline with their loyalty. “They will like this, [and] they will come back and repurchase us," Watterson said in 2022.
Is there any chance that once Elliott is done with its short-term play that Southwest goes back to being Southwest?
“And it also doesn’t include in-seat screens”
>I was Team In-Seat Screens but having to rely on your device isn’t a bad option. Airlines can offer more content and (I would hope) charge less because they’re carrying less weight around because there’s no wiring or screens. People are already using their phones or tablets to watch downloaded content, so why not just provide the airline’s content on there?
The optics on the bag fees is horrible. Like all other airlines, over 50% of the traveling public do not check bags. There is a fundamental underlying issue with checking a bag, waiting for the bag at the end of a trip and potential loss. So, now Southwest has eroded what was left of their differentiation strategy, and at what price (revenue). Unfortunately, I think the layoffs really undermined the culture and you are already seeing it reflected on some of the faces at Southwest. The baggage fees and the loss of the old Wanna Get Away fares is really going to hit a lot of the loyal customers hard. If I were Jordan, I would retire because this isn't Herb's airline, at all, any longer.