By Niraj Chokshi
Three years ago, Southwest Airlines started flying out of Bellingham, Washington, a growing city near the Canadian border, aiming to do what it had done in dozens of smaller airports — sell lots of tickets to people who have few other travel options.
Officials and residents in Bellingham, which sits between Seattle and Vancouver, British Columbia, were thrilled as the airline added new nonstop service to cities on the West Coast at affordable prices.
“The community embraced them, and we loved having them,” said Rob Fix, the executive director of the Port of Bellingham, which oversees the airport.
But the expansion didn’t work as planned. This year, facing unexpected costs and challenges, Southwest left Bellingham and a handful of other cities it had started serving during an ambitious period of growth early in the recovery from the pandemic — markets that it said were underperforming.
The retreat was a telling reversal for Southwest. The airline’s simple strategy of providing cheap flights and good service, often at smaller airports near large metropolitan areas, was tremendously successful for a half-century, earning consistent profits as many other airlines stumbled. But its playbook is showing signs of wear, raising questions about whether it can regain its momentum.
“Southwest experienced great success adhering to one business model for a bunch of years, and then the world around them changed and they didn’t really adapt,” said David Neeleman, an airline entrepreneur who sold his first company to Southwest in 1993 before starting JetBlue and, most recently, Breeze Airways.
Some analysts say Southwest was so successful for so long that it grew complacent, resisting strategies that other airlines have used effectively to increase profits and win over travelers, like offering more premium seats and services.
For years, airlines have carved their plane cabins into various tiers of service and fares. They have appealed to cost-conscious customers by offering restrictive basic economy fares while offering bigger seats and other creature comforts to affluent travelers. Southwest made some adjustments, like selling priority boarding to appeal to business travelers, but it largely stuck to how it had always done business.
The airline’s longtime strategy of flying a single airplane model — the Boeing 737 — to reduce costs and maintain flexibility also became a liability. A quality crisis and a debilitating strike at Boeing this year have severely limited production of 737 jets. Southwest now expects to receive 20 new planes in 2024, not even a fourth of what it had expected as recently as a year ago.
Southwest’s struggles have been laid bare in its recent financial performance. In the first nine months of this year, the company reported a profit of $204 million, far behind Delta Air Lines’ $2.6 billion and United Airlines’ $2.2 billion.
The airline’s shortcomings made it the target of hedge fund Elliott Management, which revealed this summer that it had amassed a 10% stake in the company.
Elliott criticized Southwest for failing to control costs, eroding its once-enviable profit margins, and demanded big changes, including the firing of the company’s CEO, Bob Jordan. The airline’s stock was sagging, and a meltdown two years ago when it canceled thousands of flights exposed weakness in its leadership and operations, the investment firm said.
In response, Southwest accelerated a number of changes.
In September, Jordan laid out a three-year plan that included switching to assigned seats to speed up boarding and appease customers frustrated with the current seat-yourself policy. Southwest also said it would add seats with extra legroom, which it will charge more for, and red-eye flights that let it use planes for more hours every day.
The airline also added board members picked by the investment firm, and Elliott dropped its demand for Jordan’s departure.
Southwest declined requests for an interview with Jordan for this article, but he told investors last month that he and the company were aware that they needed to make big changes. “It’s all eyes forward here as we work to set up Southwest for success for generations to come,” he said.
Even before Elliott came along, Southwest had started making some upgrades. In 2022, it unveiled plans to install power outlets in every seat, faster internet service and larger overhead bins. This year, it finally allowed flights to be listed on third-party search engines like Google Flights and Kayak.
An airline’s evolution
While its recent profits have lagged, the airline had an unrivaled 47-year streak of annual profits until the pandemic brought travel to a standstill. It lost money in 2020, like the rest of the industry, but has reported profits each year since.
Southwest is the only one of the four largest U.S. airlines to have never filed for bankruptcy protection.
Today, Southwest carries more passengers than any other U.S. airline and operates more flights than any airline in the world except for American Airlines. Travelers have ranked its economy class above any other in North America for three years running, according to J.D. Power.
For decades, Southwest thrived by adhering to a simple model of low fares and good service, with a healthy dose of irreverence.
The airline started flying in 1971 out of Dallas Love Field, where Southwest has remained for decades despite the opening of the much-larger Dallas-Fort Worth International Airport just a few years after the company’s founding. Early on, the airline connected Dallas to Houston and San Antonio, pitching itself as an alternative to driving. But it quickly grew into a disruptive force.
Braniff International, which also flew from Dallas, tried to undercut Southwest in its early days by offering $13 fares. Southwest matched those prices at a loss, but also offered a giveaway to customers who paid the full $26 fare: a bottle of liquor. That appealed to many business travelers on company expense accounts and helped Southwest stay viable.
Over the years, the airline would often start flying to small airports overlooked or poorly served by other airlines. In what became known as the “Southwest effect,” the airline’s entry would stimulate demand and pressure other companies to reduce fares. In the 1990s, it became one of the first U.S. airlines to sell tickets directly to customers online.
Southwest’s success inspired imitators, and low-fare airlines began sprouting up around the world.
But its model has been under pressure for years. As it grew, it started operating at airports where maintaining low costs and frequent flights was more difficult.
Southwest now flies to Hawaii, for example, which has required it to put pilots through extra training and its planes through additional certification to fly over the ocean. It started flying international routes. And it moved into congested airports like LaGuardia in New York City.
“One of the things that made it magical also limited its potential growth,” said David Vernon, an analyst at Bernstein, an investment firm. “That ability to move with high frequency, there’s only so many places you can run that model.”
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