Southwest Airlines was once an admired company and is now besieged on multiple fronts from activist investor Elliott Investment Management, which has been pressuring the airline to become more profitable. Its Chief Operating Officer told employees to brace for “hard decisions,” including changes to its route and flight network.
Activist Investor’s Challenge
Southwest Airlines has been even more in the press for all the wrong reasons recently, with an activist investor, Elliott Investment Management pushing for a raft of changes to help revive the airline’s fortunes. The investor has also called for a review of the airline’s route network, revenue management practices and sales and distribution strategies.
Southwest for its part already said that Executive Chairman Gary Kelly is set to retire next year, and six other board members will leave in November. That the airline is overhauling its executive suite means it’s at least taking the activist investor seriously and might be prepared to make wholesale changes necessary to get a handle on its financial struggles.
Suffering Feels Unimaginable. Hard Decisions Ahead
The airline will have to make some tough decisions, said Southwest Airlines Chief Commercial Officer Andrew Watterson. Such decisions are expected to include changes in the airline’s network of routes and flights, as it seeks to “sweat our assets more” and “get on top of our costs.”
Watterson said these moves will happen at least in part on the revenue side, while declining to say whether they come at the expense of employees— though he hastened to add that is not his point of emphasis — or customers; instead, “our focus is going to be on ‘let’s get our profitability and equation balanced.'” This said to me the airline was thinking about things like premium seats and red-eye flights, as well assigning seating–all potential mechanisms to make more money.
Yet, the ‘tough decisions’ may also entail slashing or even cancelling some of its routes and frequencies as part of ensuring it runs at maximum yield in an effort to stem losses. Watterson has noted that these changes seen so far do not translate to “city closures,” but it remains uncertain exactly how the local communities and employees will be affected.
Conclusion
Elliott and southwest airline are at a historic juncture. The airline’s management have already signalled there are ‘hard decisions’ to be made in the new year that will likely include changes to its route network as they try to prove their turnaround plans and win over the activist investor. The details of these decisions still need to be ironed out, but this situation leaves little doubt that Southwest is facing a crossroads and the decisions it makes in the next few months will have lasting implications for how it looks as a much larger company.
