Southwest Loses its Swagger

The airline planned to emerge from Covid stronger, as it did after 9/11 and the Great Recession. That has not happened.

Dear readers,

As I listened to Southwest's earnings call on Thursday, I recalled how much swagger its executives showed early in the pandemic. Southwest had leveraged two earlier crises — 9/11 and the 2008 financial crisis — to grow at the expense of competitors, and management had similar expectations for Covid-19, promising they would ride their superior balance sheet to U.S. market domination.

Lest you think I'm misremembering, you may want to read the Nov. 16, 2020 Wall Street Journal article headlined: "‘Predatory and Opportunistic’: Southwest Airlines Seizes the Moment as Rivals Struggle.” It is filled with quotes from executives, analysts, and union leaders about how Southwest would crush the competition, just like after the Great Recession when it entered Boston and New York LaGuardia. “We can do that same thing again,” COO Andrew Watterson told the WSJ’s Alison Sider. “But we have to do it on a bigger scale, because the hole we’re in is bigger.”

Southwest did use the pandemic to claim some new turf, including gates at Chicago O’Hare. But there was been no domination. Not even close.

So far, Delta and United, the only two global premium airlines in the United States, have been the big post-pandemic winners, as they have the right product to match what consumers want today. Many low-cost and ultra-low-cost airlines have struggled. No one is sure exactly why. Maybe their customers went to Europe. Perhaps they defected to global network carriers. Or maybe they’re just staying home, hit by inflation and the return of student loan payments.

Considering the carnage we have seen elsewhere — Spirit on Thursday reported a loss of $157 million with an operating margin of -15(!) percent, while Frontier reported a loss of $32 million with a -6 percent operating margin — Southwest’s third quarter wasn’t that bad. The airline produced net income of $193 million on total revenues of $6.5 billion.

But Southwest has a history Spirit and Frontier do not. It racked up 47 consecutive profitable years before the pandemic, often with top-tier margins. It’s an airline that long has had a network and the customer base that other airlines covet. Now, it’s fresh off a summer in which it eked out an operating margin of about 3.4 percent, while Delta and United managed more than 12 percent.

What’s perhaps worse is that management does not appear to have a clear idea of what’s wrong or how to return to that juicy summer 2019 operating margin of 14.5 percent. Or if it does, it’s not saying much about its plans.

Repeatedly, when faced with tough questions on Thursday by impatient analysts, two top executives retreated to platitudes and cliches¹ that essentially boiled down to two things: the airline needs to reduce costs and raise revenue. But when it came time to the how, there were no answers. Only vague promises that they were working really hard, and that at some point, they would share more.

CFO Tammy Romo shared these plans:

• "We're not content with our cost outlook. We are rolling up our sleeves and we're going to keep working on and proving that outlook."

• "Clearly more work ahead and we're hard at work for you."

• “We're going to drive operational efficiency and, as Bob [Jordan] said earlier, work both sides of the equation. So stay tuned as we work through that."

• "We are going to work really hard here to drive efficiencies and certainly leverage our network opportunities."

• "We are working on our 2024 plan. And, you know, we'll certainly fill in more of the answers so that you can kind of see how it all weaves together here. So stay tuned and more to come."

While CEO Bob Jordan had this to say:

• “We're still hard at work on both our 2024 and long-term plans. But we're building them with a priority and a focus on generating value —  value for employees, value for our customers, and of course value for our shareholders.”

• "I'm just trying to convey that we're hard at work and there is a lot on the table."

• "It is absolutely the plan to improve margins in 2024, and we're committed to getting back to our long-term outperformance in operating margin."