A graphic showing the Southwest logo within a tug-of-war

Southwest Battles Summer Storm Elliott

Gordon Smith and Jay Shabat
June 2024
34 min read
A graphic showing the Southwest logo within a tug-of-war

Suddenly, Southwest Airlines is under attack, not by a competitor, but by an activist investor demanding big changes. Elliott Management, best known for a years-long bond battle with Argentina’s government, wants Southwest’s CEO and Chairman removed. And it’s built a $1b-plus ownership stake to exert its influence.

Elliott says the airline needs new management blood, with experience from outside the company. It’s not happy with Southwest’s recent profit margins, nor its recent stock price declines, nor its recent operational meltdown. CEO Bob Jordan and his team, Elliott argues, have been slow to modernize, slow to invest, and slow to adapt.

A fair critique? Jordan might argue that one of Elliott’s chief arguments—that Southwest is underperforming the U.S. Big Three—is grossly unfair. Don’t compare Southwest to Delta, American, and United, he would say. Those are global airlines enjoying a momentary yield bonanza from booming intercontinental and premium markets—markets which Southwest doesn’t serve. A better comparison might be Southwest versus other low-cost carriers like JetBlue, Spirit, and Frontier, all of which it’s thoroughly outperforming.

Give us a few more months, Jordan assures. In September, his team will unveil a new set of strategic initiatives to further boost revenues and lower costs. But how incremental or radical will these be? Make no mistake: Southwest hasn’t been its usual self since travel demand began its post-pandemic revival in the spring of 2022. In 2023, for example, its operating margin was just 3%, compared to 13% in 2019. The main reasons: surging non-fuel cost inflation (especially from new labor contracts), a fleet and cost mitigation plan in disarray due to Boeing delays, and again, its absence from premium and intercontinental markets.  

Would Southwest be faring better with bag fees? With another fleet type? With more aggressive ancillary selling? Does Jordan merit blame for not entering the premium market? Has he been too slow to revamp a network that by his own admission, features numerous routes unable to make money at current cost levels? Elliott clearly thinks so.

Southwest is of course not alone in seeing its profit margins drop from the pre-Covid era. As our chart below makes clear, however, many airlines are in fact faring better now than five years ago. It shows operating results for the first quarter of this year, and keep in mind that first quarters are slow for many airlines. So, don’t think Ryanair, for example, is having a bad year just because of its first quarter red ink. More substantively, many airlines in East Asia and Latin America enjoyed excellent first quarters, and not simply because of seasonality. In these regions, carriers undertook dramatic restructurings, often in bankruptcy, resulting in lower cost structures even after years of heavy inflation. Remember too aircraft supply disruptions—affecting all regions of the world—are lifting unit revenues.

But is unit revenue momentum slowing? There’s some evidence of that, from some carriers. Canada’s Air Transat, for one, isn’t thrilled with what it’s seeing. KLM’s chief (see below) tells Airline Weekly that its U.S. routes face demand that’s “a little less than what we were seeing before.” Transat’s comments aren’t in any case stopping Virgin Atlantic from adding a new London-Toronto route. In a separate non-transatlantic development involving London, easyJet last week announced a barrage of new routes across Europe, including several from the U.K.’s capital.

With July quickly approaching, airlines have just a few weeks left to boost their second quarter fortunes. In another month or so, Q2 earnings season will begin…

Airline Weekly Lounge Podcast

What’s Going on at Southwest Airlines?

In part one, Gordon Smith and Jay Shabat discuss a fascinating week at Southwest, as the low-cost carrier navigates the challenges of a very vocal new activist investor.

In part two, Gordon chats with Skift Airlines Reporter Meghna Maharishi about a major new feature examining female representation across the aviation sector. Listen to the episode here, and find a full archive of the Lounge here.

Weekly Skies

Highlights from the Air France/KLM shareholder meeting

  • At Air France/KLM’s annual shareholder meeting on June 5th, the airline reviewed what it described as a successful but challenging 2023. While its 6% operating margin for the year was again below what rivals IAG and Lufthansa produced, it represented an improvement from 2019, with Air France specifically showing substantial improvement. That’s despite the ongoing fallout from “the war in Ukraine on Europe’s doorstep,” plus a ban on operations in Mali (a former French colony in Africa), airspace closures over not just Russia but also Nigeria, plus the Israel-Gaza war that disrupted traffic in the Middle East. The company also mentioned “rampant inflation.” 
  • On the other hand, demand was strong—and yields exceedingly strong— across most of Air France/KLM’s diversified global network. Its ASK capacity, meanwhile, was just 93% of what it was in 2019. 
  • Also last year, the company repaid all the money it borrowed from the French and Dutch governments during Covid. And it raised lots of new capital, in part by monetizing ownership in its Flying Blue loyalty plan (while retaining control of the plan). The airline did express concern, however, about weakness in its Q4 results, “giving us cause for caution and forcing us to step up our transformation plans.”
  • Looking ahead, “we are committed to consolidating our sector, particularly in Europe.” Step one in that regard was buying a stake in Scandinavia’s SAS, which will soon exit bankruptcy. It still has its eyes on TAP Air Portugal too, waiting for now as a new Portuguese government contemplates the airline’s possible re-privatization. “If and when they do put the airline up for sale… [that] could be of interest to us.” 

“…we are committed to consolidating our sector, particularly in Europe.”

Air France/KLM
  • Other strategic initiatives for Air France/KLM include transforming its low-cost airline Transavia into “a leading low-cost European player,” growing Flying Blue (the plan currently has more than 24m members), developing a new A350 maintenance joint venture with Airbus, working closely with partners like Delta and Virgin Atlantic, reducing carbon emissions, and ultimately earning annual operating margins that exceed 8%. 
  • It warned, however, that “national level fees and taxes have unnecessary burdens in both France and the Netherlands.” In addition, the EU emissions trading system and sustainable aviation fuel mandates “apply only to EU carriers, creating an uneven competition landscape.” And finally, “non-EU airlines may benefit from easier access to capital, lower taxes, or geographically based cost advantages.” 
  • Air France/KLM’s shareholders, for the record, include both the French and Dutch governments, plus the airlines Delta and China Eastern. The French shipping giant CMA-CGM also owns shares, as do employee groups. 
  • Air France/KLM expects to be extremely busy this summer, with the Olympic Games in Paris starting next month. In an interview with Bloomberg News, Smith added that North Atlantic, South Atlantic, and African longhaul routes are all strongly booked for the summer, though Asia is challenged by loss of access to Russian airspace.
  • KLM’s CEO Marjan Rintel shared thoughts of her own with Airline Weekly’s Gordon Smith. See our CEO Insights section to find out what she said.

Signs of Yield Weakness at Air Transat 

  • Canada’s Transat, a tour operator based in Montreal, reported a negative 2% operating margin (ex items) during the months of February, March, and April (its fiscal second quarter). Air Transat, the group’s airline, is among the many carriers challenged by aircraft supply disruptions, in its case Pratt & Whitney GTF engine issues affecting the delivery of long-range Neo jets. Management also cited “intense competition,” Canada’s “economic slowdown,” and “the negative impact on bookings of employee strike threats.” 
  • All this led to “downward pressure on airline unit revenues.” Though Transat reports “sustained demand for travel,” it said growth isn’t as strong as last year, creating a situation of market overcapacity. That’s true even as Transat was forced to cut routes due to late-arriving Neos. Summer yields, alas, are looking weaker than hoped. 
  • Air Canada, which nearly purchased Transat a few years ago—the deal was nixed by European regulators—remains its chief rival. Porter Airlines, on the other hand, has become a close friend. The two airlines are forming a joint venture, with Transat already serving as Porter’s tour operator (for its customers who want a packaged vacation). Transat also plans to form a loyalty plan next year, which will work closely with Porter’s plan.

Jay Shabat and Gordon Smith

Airline Earnings Scoreboard: Q1 2024

Q1 2024 op marginQ1 2024 op margin
1Bangkok Airways31.6%37Garuda1.3%
3Thai Airways24.1%39Alaska*0.8%
5Sun Country18.2%41Air Canada0.2%
6T’way Air18.0%42All Nippon-0.4%
7AirAsia X 17.7%43Turkish Airlines-0.6%
8Azul17.1%44Air Astana -0.9%
9VivaAerobus16.8%45Transat (feb-apr)-1.8%
10El Al16.3%46Finnair -1.8%
12Spring Airlines15.0%48China Eastern-2.4%
13Philippine Airlines 14.7%49Skymark-2.4%
14Air Arabia14.4%50Japan Airlines -2.5%
15Jeju Air 13.9%51Aegean-2.7%
17Volaris13.5%53Air China-4.4%
18IndiGo13.2%54TAP Portugal -5.0%
19EVA Air 12.8%55Southwest-6.0%
20SkyWest12.4%56Mesa Air-6.9%
21Singapore Airlines11.8%57JetBlue-7.1%
22Juneyao 11.8%58Air France/KLM-7.3%
24Korean Air 11.4%60Alaska/Hawaiian-9.9%
25Avianca 10.6%61Norwegian-10.4%
26Cebu Pacific10.5%62Lufthansa Group-11.5%
27Wizz Air9.9%63Spirit-13.9%
28Hainan Airlines9.9%64Royal Jordanian -14.1%
29Etihad8.7%65airBaltic -14.7%
30China Airlines7.9%66easyJet -15.2%
31Delta5.1%67SAS (feb-apr) -15.2%
32China Southern4.8%68Ryanair-15.5%
36Allegiant2.3%72Norse Atlantic -68.3%

Source: Airline Weekly analysis of company results

*United’s figure adds back cost of Max 9 disruption; Alaska’s figure includes compensation from Boeing for Max 9 disruption

Comparing Airline Financial Performance, Post- vs. Pre-Pandemic

Operating margin (ex special items) in 2023 vs. 2019; Which airlines have improved the most? Which have declined the most?

Right column shows ranking of most improved

Airline (sorted alphabetically)2023 op margin2019 op margin2023 vs. 2019Points better or points worse
1Aegean15%9%1Thai Airways29
2Aeroflot -2%9%2AirAsia X 23
3Air Arabia21%20%3Jin Air19
4Air Canada11%9%4Bangkok Airways16
5Air China-3%9%5Asiana14
6Air France/KLM6%4%6Philippine Airlines14
7Air New Zealand 7%6%7Jeju Air 12
8AirAsia 13%7%8Cathay Pacific 11
9AirAsia X 19%-3%9El Al11
10airBaltic 11%6%10EVA Air 10
11Alaska 8%12%11TAP Air Portugal 9
12All Nippon11%6%12Turkish Airlines9
13Allegiant10%20%13Avianca 9
15Asiana8%-6%15Singapore Airlines9
16Avianca 13%4%16Korean Air 9
18Bangkok Airways14%-2%18Garuda7
19Cathay Pacific 14%3%19IndiGo7
20Cebu Pacific9%15%20Kenya Airways7
21China Airlines6%2%21VivaAerobus6
22China Eastern-6%3%22AirAsia 6
23China Southern1%4%23Aegean5
24Chorus/Jazz14%15%24All Nippon5
25Copa23%16%25Qantas 5
26Delta12%14%26airBaltic 5
27El Al11%0%27LATAM4
28EVA Air 15%5%28China Airlines4
29Finnair 6%5%29Ryanair3
31Garuda11%3%31Lufthansa 2
32Gol18%19%32Air Canada2
33Hawaiian-12%11%33Air France/KLM2
34IAG12%13%34Air New Zealand 1
36IndiGo13%6%36Air Arabia1
37Japan Airlines 8%10%37Finnair 1
38Jazeera5%14%38Juneyao 1
39Jeju Air 10%-2%39Sun Country1
41Jin Air14%-5%41IAG-1
42Juneyao 8%7%42Chorus/Jazz-1
43Kenya Airways6%-1%43United-1
44Korean Air 11%2%44Gol-1
46Lufthansa Group8%5%46Japan Airlines -2
48Pegasus20%19%48China Southern-3
49Philippine Airlines 16%2%49Alaska -4
50Qantas 13%8%50SAS (feb18-jan19)-5
51Ryanair17%13%51Cebu Pacific-5
52SAS (feb18-jan19)-3%2%52Volaris-6
53Singapore Airlines15%7%53China Eastern-9
57Sun Country13%12%57Allegiant-10
58TAP Portugal 11%2%58JetBlue-10
59Thai Airways25%-4%59Aeroflot -11
60Turkish Airlines14%4%60Air China-11
63VivaAerobus13%7%63Wizz Air-14
65Wizz Air2%16%65Hawaiian-23

Source: Airline Weekly analysis of company reports

Routes and Networks

Virgin Returns to Canada

  • Virgin Atlantic marked its 40th birthday last week with a suitably glitzy party in Las Vegas. Alongside the usual festivities was a special announcement from Sir Richard Branson – Virgin is adding Canada back to its route map. From March 30, 2025, the British carrier will fly from London Heathrow to Toronto. Flights will operate daily and represent Virgin’s first Canadian service in more than a decade. A mix of new Airbus A330neos and much older A330ceos will ply the transatlantic link. 
  • It comes as the airline continues to revamp its all-widebody fleet. Virgin has already received two A350-1000s this year, from a total order of 13, as well as one A330-900, from an order of up to 16. A further three neos are due before the end of the calendar year.
  • As well as point-to-point traffic, Virgin has highlighted “optimal connectivity” to its services to and from India, tapping into the Toronto area’s large Indian diaspora. The carrier flies to Delhi and Mumbai twice daily from Heathrow, with the southern city of Bengaluru also served. 
  • To further bolster the route economics on the Canadian side, Virgin Atlantic is expanding its codeshare with Calgary-based WestJet. The enhanced partnership is expected to come online in October and will allow connections to destinations including Ottawa and Winnipeg. Frequent flier reciprocity is “expected to follow” in 2025.

Qantas’ Shanghai Shuffle

  • Last month Qantas, famed for its kangaroo-emblazoned planes, announced it would be hopping out of Mainland China amid fierce competition from local operators. At the time, Qantas International CEO Cam Wallace admitted that some flights to and from Shanghai were “around half full.” Now, Wallace has provided extra insight into the move. 
  • Asked by Airline Weekly about the decision, the Qantas chief suggested that pulling out of Shanghai was a source of pride, rather than embarrassment. “We’ve got to make nimble and agile decisions in terms of our network management, so I’m pretty proud of that decision because we’ve been quite focused [on] getting the return on capital where we deploy it,” he said. When the carrier’s Sydney-Shanghai route ends on July 28, it will leave Hong Kong as the only Chinese destination served nonstop by Qantas. The company’s Sydney-Beijing flights did not return to the schedules after the pandemic.

“Getting out of China at that point was the right call from our perspective.”

Cam Wallace, Qantas International CEO
  • “Getting out of China at that point was the right call from our perspective,” Wallace said. The Qantas International CEO described a failed commercial partnership with China Eastern as a factor, but said wider considerations were at play. “We had an approval process that we went through with the ACCC [Australian Competition and Consumer Commission], which wasn’t approved. That wasn’t a material factor, but it was one of the factors. Then when we looked at the network and where we saw some opportunities for growth, we thought we could deploy the aircraft in a better way. That’s because supply [between China and Australia] came back at about 100% and demand came back at about 66%, so there was that economic mismatch which didn’t give us the confidence to deploy the aircraft.”
  • The scrapping of the short-lived Shanghai route will allow Qantas to make enhancements elsewhere in its network. A four-times weekly link between Brisbane and Manila will begin on October 28 and marks the first time the carrier has operated the route in more than a decade. There will also be additional frequencies from Australia to Singapore and India. Qantas has not ruled out a return to Mainland China in the future and said it will closely monitor market conditions. 
  • Looking beyond the specifics of Qantas’ retreat from Shanghai, Wallace hinted that the airline would not be afraid to make further bold decisions to maximize profitability. “We’re in a constrained environment in terms of our long-haul, widebody aircraft, and we will be for another two or three years as the fleet reinvestment takes hold. We’re going to have to make decisions quicker, we’re going to have to be nimble and agile with deploying aircraft into more productive city pairs.”

Emirates’ Fifth Freedoms

  • Emirates is adding another quirky route to its network. From September 3, it will add an extra leg to its existing service between Dubai and the Seychelles. The four-times weekly flight will soon continue onwards to Antananarivo, the capital of Madagascar. Flight EK707 will depart from Dubai at 8:55am, arriving in Mahe at 1:35pm. It carries onto Antananarivo, with a scheduled arrival at 4:50pm local time. The return EK708 departs Madagascar at 6:35pm, lands in Mahe at 10:20pm and touches back down in Dubai at 4:20am the following day. 
  • As Emirates is operating the flight in a fifth freedom capacity, passengers will be able to book onto the Mahe to Antananarivo sector without the need to start or end their journey in Dubai. Other Emirates routes to follow this format include Dubai-Athens-Newark, Dubai-Barcelona-Mexico City, and Dubai-Miami-Bogota.
  • The route will be served by the Boeing 777-300ER. It is typically configured with eight First Class suites, 42 Business Class suites and 310 Economy options. As Emirates’ increasingly popular Premium Economy product is slowly being retrofitted to its fleet, it will not (yet) be provided on the new service.

The Flight for Votes

  • As the 2024 U.S. presidential election gathers momentum, United Airlines and American Airlines are increasing capacity to Milwaukee and Chicago. Why? The two cities will host the Republican and Democratic National Conventions. 
  • United says it will add nearly 200 services for the political gatherings. For example, the Chicago-based carrier will increase its Milwaukee capacity by 75% for the Republican convention in July and fly its largest schedule to Chicago for the Democrats in August. Part of United’s summer schedule also includes a 40% increase in flights between Chicago O’Hare and Washington Reagan. 
  • United said it would also add a new flight between Reagan and Milwaukee, along with 72 additional flights to the Wisconsin city from its hubs at O’Hare, Newark, Denver, Dulles and Houston. The company will also deploy larger aircraft for 20 round-trip flights. For the Democratic convention, United is adding 38 more flights between O’Hare and Reagan. During peak convention days, it will operate a Boeing 737 Max 8 on the route.
  • For its part, American is upgrading its Reagan to Milwaukee route to its mainline fleet that will use Boeing 737s, Airbus A319s and A320s. AA is also adding a route from LaGuardia to Milwaukee. An American Airlines spokesperson said it is not planning any changes to flights to O’Hare from LaGuardia or Reagan as these are already major mainline routes. 

Routes In Brief:

  • European low-cost carrier easyJet has announced what it claims to be its largest ever release of new routes. A total of 60 new services are being added for winter 2024. More than half of the city pairs either depart or arrive in the United Kingdom, with 11 British airports seeing additional links. Tromso in Norway and Strasbourg in France are due to join the easyJet map for the first time. The airline now had more than 1,000 routes on sale, serving over 160 airports in 36 countries.
  • JetBlue, hoping to engineer a financial turnaround, announced a new market last week. For the first time, it will fly from Long Island Islip airport, not too far from its home base at New York JFK. Service will run to three Florida markets. Separately last week, the LCC began flying to Tulum, located down the Caribbean coast of Cancun. It’s operating one daily A320 flight to and from JFK. 
  • LOT Polish Airlines will fly to the Austrian winter wonderland of Innsbruck from November. A once-weekly service from Warsaw to the Tyrolean capital will operate from November 29 until March 28. Departures are on Fridays and will be operated by Boeing 737s. Innsbruck joins Tashkent, Athens, Oradea and Riyadh as new additions to the LOT route map for 2024. 
  • The Brazilian city of Florianópolis will soon welcome its only nonstop European route. From September 3, TAP Air Portugal will link its Lisbon hub with the southern Brazilian city. The service will operate three-times weekly and become TAP’s 12th destination in the country. Flights will be served by the carrier’s A330-200s in a two-class configuration.

Gordon Smith and Jay Shabat

Additional reporting by Meghna Maharishi

By the Numbers

The Most On-Time Global Airports: May 2024

N.b. Cirium defines a ‘global airport’ as having 25-40 million available seats, actual gate departure coverage 80% or better, and must serve at least three regions, inclusive of its own.

On-Time RankingAirportOn-Time DepartureTracked FlightsTotal FlightsRoutes Served
1Riyadh King Khalid International Airport (RUH)88.23%82.17%19,62091
2Oslo Airport Gardermoen (OSL)87.97%98.71%18,252111
3Lima Jorge Chavez International Airport (LIM)86.86%84.11%14,59362
4Tokyo Haneda Airport (HND)85.99%98.21%40,07799
5Santiago Arturo Merino Benitez Airport (SCL)85.86%99.22%11,68854

Source: Cirium

Departures and Arrivals

Notable vacancies, appointments, and retirements from across the industry

Senior Shake-Up at Rex

  • Australian operator Regional Express (Rex) has a new CEO. Neville Howell takes on the new top job after ten years as the company’s chief operating officer. Howell, who has been with the company and its predecessors for 34 years, has signed a deal for an initial two-year term.
  • In other Rex developments, John Sharp, who has served as deputy chairman for the last two decades is moving to the role of non-executive chairman. Lim Kim Hai, who has been executive chairman for 21 years is forgoing the title, however he will remain a non-executive director and significant shareholder. Commenting on the move, Sharp said: “Kim Hai has given extraordinary service to the Rex Group during his time as executive chairman. The company has grown from a small regional operator to one of the major aviation businesses in Australia today.”
  • Rex is the country’s biggest independent regional and domestic airline. It operates a fleet of Boeing 737-800s and Saab 340s to more than 50 destinations across all Australian states.

“The company has grown from a small regional operator to one of the major aviation businesses in Australia today…”

John Sharp, Rex Airlines

JetBlue’s New Tech Guru

  • JetBlue has announced that David Marcontell will be the airline’s new vice president, technical operations. Marcontell is due to start the role on June 17 and will report to the company’s chief operating officer Warren Christie. His brief oversees maintenance, materials, engineering, quality and other operational functions.
  • Marcontell was most recently an associate partner at McKinsey & Company, however he has held a variety of other industry positions over the past four decades. He started out in the U.S. Air Force as a C-130 maintenance and engineering officer before joining Delta Air Lines. He later held engineering and operational roles at ABX Air, Boeing, and North-South Airways, before spending two decades at aviation advisory firm Oliver Wyman CAVOK. 

Kiwi Consolidation

  • In a market filing on June 12, Air New Zealand announced its Chief Corporate Affairs Officer is leaving the company. Mat Bolland will depart on July 31, amid what the airline describes as “a wider review of costs.” In a statement, CEO Greg Foran said economic challenges faced by the airline have required the firm to “make some difficult decisions to manage these costs.”
  • Bolland joined Air New Zealand in May 2021, during one of the company’s toughest periods. His immediate brief was to help the carrier navigate the later stages of the COVID-19 pandemic by forging relationships with media, regulatory and political stakeholders.
  • From June 24, Kiri Hannifin, Air New Zealand’s Chief Sustainability Officer, will take on a larger, consolidated role. Bolland will continue to work alongside the airline until the end of July in order to “complete some key initiatives.”

Allegiant Retirement

  • And finally, the Allegiant Travel Company’s chief information officer has announced his retirement. Robert Wilson will leave the business on July 1 after more than 15 years. Wilson joined Allegiant in 2009, and applied his systems and technology knowledge to transform the airline’s IT department at a pivotal time to leverage online bookings.
  • “I feel blessed to have been a part of Allegiant Travel’s unprecedented success and growth over the years. I am proud of all that we have accomplished. More importantly, I am confident in the team’s ability to continue to lead and support the technology needs of the organization into the future,” said Wilson. Allegiant confirmed that a search for his successor is already underway. 

Gordon Smith

The Stock Take

Airline Performance

June 10-14, 2024

What am I looking at? The performance of network and low-cost airline sector stocks within the ST200. The index includes companies publicly traded across global markets.

The Skift Travel 200 (ST200) combines the financial performance of nearly 200 travel companies worth more than a trillion dollars into a single number. See more hotels and short-term rental financial sector performance.

CEO Insights

Marjan Rintel, KLM CEO

KLM claims to be the world’s oldest airline operating under its original name. But a proud history is no guarantee of future success. As recent operational and political challenges have shown, KLM’s long-term relevance in an increasingly competitive industry cannot be taken for granted. Sitting down with Airline Weekly on the fringes of the IATA AGM in Dubai earlier this month, CEO Marjan Rintel shared her perspective on some of the biggest topics of the day.

Marjan Rintel - KLM CEO
Photo: KLM

Airline Weekly: We’re speaking here at the start of June, with hopefully some good visibility for the coming season. How is this summer shaping up for KLM? 

Marjan Rintel: Bookings are still looking fine and stable. Around the world, there’s still not all the aircraft capacity in place, which is helping. For us, it’s most important that we are running well operationally. We have improved a lot after the first quarter, and the May holiday [peak] was very successful, so we’re looking forward to this summer. 

Your airline is a critical component of the Air France-KLM Group. Are passengers shifting their flights through Amsterdam this summer to avoid the Paris Olympics? 

What we’re currently seeing is that our outlook is not going up, but it’s not going down. But we do see a difference in Paris. They [passengers] are avoiding Paris because of the Olympics, but we still need to see if there’s any effect of shifting from Paris to Amsterdam. As we speak today, it’s still stable.

We’ve seen operational problems with your new fleet of Embraer E2 jets. What’s the latest on their engine issues? 

If it’s flying, the E2 is a brilliant plane. Customers love it, pilots love it. It’s really efficient, the product is great. The issue is with the engines, not the plane. There are [KLM] planes grounded, but it’s also not only KLM, it is many other airlines as well, including the Airbus A220s from Air France. But it will harm us for a period of time, that’s for sure. We’re meeting with Pratt and Whitney, who make the engines, to see what’s coming up. We need to redo the engines, and that means Pratt and Whitney need to have enough capacity and spare products. We will receive their plans in a few weeks’ time, but I expect [the maintenance solutions] will take a few years.

Are you seeing any softness in bookings in the transatlantic market? 

We saw in the months after the pandemic that the U.S. market really caught up, but there’s also now been a lot of capacity put in. Therefore the demand is a little less than what we were seeing before. At the same time, Asia is catching up and we’re particularly seeing more traffic towards Japan. Some destinations in China are better than others, but there are no visa constraints anymore going to China, which is very helpful. Elsewhere, our Entebbe (Uganda) and Dar es Salaam (Tanzania) routes are proving very popular as well. As is the Caribbean; Aruba, Bonaire, and Curaçao are booming. 

How is the long-haul outlook more broadly? 

We need to add more capacity to our long-haul network. We’re still suffering from pilot constraints, therefore we’re still not at 100%. Firstly, we need to restore our pilot capacity, and therefore our long-haul capacity, and then we can start to make some choices.

You mention strengthening demand to Asia. How frustrating is it that your airline needs to avoid Russian airspace when flying, for example, from Amsterdam to China, when many other global carriers don’t? 

It’s not a level playing field. It takes another two hours for us, four cockpit crew, and of course, more fuel, which is not the cheapest today. It’s really frustrating and I think it’s harmful for relationships. We are in an international world and an international competition, so it’s very hard to have restrictions from Europe or Russia that are not valid for others. 

There’s been talk of regulatory intervention to block airlines flying into Europe or the U.S. from overflying Russian airspace en route. In principle, is this something you would support? 

Yes, of course.

Answers have been edited for clarity and length

Gordon Smith

Feature Story

Summer Storm Elliott

A Powerful Investment Firm Demands Big Changes at Southwest

Who remembers Winter Storm Elliott? Southwest Airlines will never forget it. It was Christmastime, 2022. Sub-zero temperatures, high winds, and frozen precipitation ravaged the carrier’s operation. It would cost Southwest more than $1b in lost earnings.  

Who else remembers Winter Storm Elliott? An investment firm called Elliott. And it’s not happy with Southwest’s post-pandemic operational and financial performance. Elliott Management is demanding big changes. And to exert influence, it’s amassed a nearly $2b ownership stake in the airline. 

What does Elliott want exactly? It wants a new management team, led by a new CEO to replace Bob Jordan. The current team, it argues, has almost no experience at other airlines, leading to insular decision making. They’ve been slow to adapt as the industry’s changed. And Southwest today, Elliott concluded after an 18-month study, has an outdated business strategy. It points to the company’s declining market value, its subpar profit margins, its repeated failure to meet targets, and yes, its costly operational meltdown during Winter Storm Elliott.

“Southwest today, Elliott concluded after an 18-month study, has an outdated business strategy…”

Jay Shabat

Elliott wants a new Board of Directors too, one with more independence from management, and with more airline experience. Southwest’s current chairman is Jordan’s predecessor Gary Kelly, who ran the company for 18 years. Kelly made his mark as CEO with a fuel hedging strategy that served as a powerful protective umbrella for Southwest during the fuel spike of the 2000s, which would play a big role in bankrupting many of its rivals. In 2010, Kelly purchased AirTran, providing Southwest with greater scale and scope. He would modernize Southwest’s fleet, reservation system, pricing, and network but craft and hold firm to policies that many investors questioned, like ‘bags fly free’, direct distribution, and no assigned seating. Investors though, couldn’t complain much. During the 2010s, Southwest would in all but one year outperform the U.S. industry average in terms of operating margin. For six straight years—2014 to 2019—Southwest earned double-digit operating margins, reaching a stratospheric high of 20% in 2015 (the year when global fuel prices tumbled).

But then came Covid in 2020. And gone was Southwest’s stunning streak: 47 straight years of profits. By 2022, profits were back—despite what happened with Winter Storm Elliott—thanks to an incredible second quarter that year, in which its margins were best among all U.S. airlines. Springtime 2022 was when domestic U.S. travel demand loudly reawakened, leaving America’s largest domestic airline well-placed to benefit.

Southwest would earn profits in 2023 as well, outperforming other LCCs like JetBlue, Spirit, and Frontier (operating margin was 3%). But it significantly underperformed Delta, United, and even American, a point that Elliott highlights. The Big Three, as it happened, were now the ones in the right place at the right time, well-positioned to capture a surge in intercontinental and premium demand. As all U.S. airlines grappled with surging non-fuel cost inflation—especially for labor—the Big Three seemed best capable of coping, thanks to strong pricing power in those booming intercontinental and premium segments. By the first quarter of 2024, Southwest’s labor costs had increased 49% from the same quarter of 2019, on just 12% more ASM capacity. Total revenues rose 23%, with help from a 10% increase in unit revenues. By comparison, United for example saw labor costs up 37% on 9% more ASMs. But revenues jumped 31% on a 20% surge in unit revenues. United chief Scott Kirby points to his elimination of change fees as a key reason why Southwest’s revenue gains lagged. But surely, the latter’s absence from the intercontinental and premium markets is the more important reason.

Besides its expensive new labor contracts, Southwest’s unit cost control was greatly hampered by its failure to receive 737 Max jets from Boeing. Jordan and his team were counting on these planes to grow—growth that would help lower unit costs. Instead, it’s left with a larger fleet of older generation B737s with inferior economics. Southwest is certainly not alone in seeing its cost control plans upended by aircraft supply disruptions. And to be sure, aircraft supply disruptions have driven up yields for all airlines, Southwest included. But one unique frustration for Southwest is that it’s the only U.S. airline besides Allegiant that’s ordered the smallest Max version (the -7) which hasn’t even been FAA-certified yet. 

“Southwest’s unit cost control was greatly hampered by its failure to receive 737 Max jets from Boeing”

Jay Shabat

In any case, management finds itself under attack now, forced to defend its actions. It responded to Elliott’s attack by expressing confidence that “Southwest Airlines has the right strategy, the right plan, and the right team in place to drive long-term value for our Shareholders.” In recent months, it’s trumpeted a newly-implemented revenue management system, a revamp of onboard services, improved operations, growing corporate revenues, record total revenues, and a refreshed Board of Directors, all “tangible steps toward achieving improvements in our financial and operational performance and positioning us for sustainable success in an evolving marketplace.” It plans to introduce “a new set of strategic initiatives” at an investor day event planned for September.

His confidence notwithstanding, Jordan said during the airline’s Q1 earnings call that he was “disappointed” with Southwest’s financial performance. He said clearly, “We need to increase revenue production to offset cost inflation.” Jordan acknowledged that the network needed a revamp, given “a material number of markets that are not performing at the level required in this higher cost environment.” He promptly announced a full retreat from four airports (Syracuse, Houston Bush, Cozumel, and Bellingham). The carrier also moved to downsize in markets like Chicago O’Hare and Atlanta, while reducing headcount through voluntary departures and time-off programs. Downsizing capacity, however, puts further upward pressure on unit costs. Clearly, Southwest needs to find a way to further boost revenues.

Will that involve offering premium seats for the first time in its history? In Southwest’s Q4, 2023 earnings call, chief commercial officer Ryan Green cautioned that premium demand can be highly cyclical. In the Q1, 2024 call, however, Jordan said management is studying “customer preference around seating and our cabin,” hinting at perhaps some changes to come this fall.

Elliott, for its part, isn’t recommending any specific changes, just a new Board and management team (sourced from outside the company). But it makes clear that some degree of significant change is required, slamming Jordan and his team for a “rigid commitment to a decades-old approach [that] has inhibited its ability to compete in the modern airline industry.” It added, “This ethos pervades the entire business with outdated software, a dated monetization strategy, and antiquated operational processes.” And just in case it didn’t make the point clearly, Elliott cited “four-plus years of consistent disappointments,” “self-inflicted performance deterioration,” a “complacent approach,” a lack of urgency to confront challenges,” and a “preference for incrementalism.”

” Inter-island Hawaiian routes are tough, management would surely admit, but they make Southwest’s Rapid Rewards loyalty program more valuable…”

Jay Shabat

Southwest’s refusal to add premium seats is certainly one strategy that’s hotly debated. Even more controversial among investors is its ‘Bags Fly Free’ policy. Did Southwest blunder by entering the inter-island Hawaiian market, as Elliott suggested by citing its woeful load factors? Did the airline fail to adequately invest in informational technology? Does it need a broader product overhaul beyond just premium seats? Is its distribution policy—which still shuns most third-party online travel agencies—the right one? How about its boarding policy? Should Southwest seek codeshare and alliance partners? Does it need to diversify its fleet and become less dependent on Boeing? Is it moving too slowly to adopt overnight “red-eye” flying? Is it too passive when it comes to chasing ancillary revenue? Would a Basic Economy fare offering boost earnings? How about denser seating configurations? Does it need to take a harder-line stance with ground worker unions, pushing for example, to outsource additional work? Might Southwest do itself good by purchasing another airline? In that regard, should it have countered Alaska and tried to buy Hawaiian?

Perhaps there’s some new thinking on these matters, to be unveiled in September, at investor day. But Jordan already made pretty clear, for one, that bags will still fly free. In its defense, the policy is popular with many, helping it raise base fares rather substantially. Inter-island Hawaiian routes are tough, management would surely admit, but they make Southwest’s Rapid Rewards loyalty program more valuable. In 2017, Southwest installed the popular Amadeus Altea reservation system, leaving it with information technology no less modern than other airlines. After winter storm Elliott, the airline committed to spend $1b on further IT upgrades. That’s despite, according to Jordan, having IT that “generally worked as designed [during the winter storm]… we were hit by an overwhelming volume of close-in cancellations, which put us behind in creating crew solutions, which, in turn, pushed us to manual efforts and solutions.”

Southwest, to be sure, runs a giant point-to-point network operation that’s unique in the industry, making off-the-shelf software solutions often less than ideal. Its unique network complexity would also greatly complicate any plan to add an additional aircraft type. Also, having never gone through bankruptcy, Southwest’s labor contracts are in some ways rather restrictive, limiting or at least complicating management’s options in areas like red-eye flying or codesharing with other airlines. It has nothing like the labor flexibility that Ryanair in Europe, for example, enjoys. 

For its part, Elliott admits that Southwest retains many powerful strengths and advantages: A “robust” domestic network, dominant market positions in many of America’s largest metros, “leading loyalty economics” from Rapid Rewards, a young and single fleet type, a “strong employee base, and “recently resolved labor agreements [that] provide operational stability.” And critically, Southwest retains a rock-solid balance sheet with a positive net cash position and $17b of unmortgaged assets. Indeed, even if Elliott doesn’t force the change it’s looking for, it will still have an ownership stake in a financially healthy company—this would be less the case had it waged an attack on say, American or Spirit.   

What’s the next act in this unfolding corporate drama? Management, which said it learned about Elliott’s move just one day before it was announced, promised to engage with its new investor, hoping to allay its concerns and change its mind. At least one other major shareholder—Artisan Partners—publicly expressed support for Elliott. It said it too—over the past few months—has been quietly urging the Board to hire new leaders. One critical constituency that hasn’t yet taken a stance, however, are the company’s major unions. SWAPA, Southwest’s pilot union, will be particularly influential. Will it side with current management? Or will it throw its influence behind Elliott’s crusade?

Like many of America’s large publicly-traded companies, Southwest shares are largely controlled by mass market investment firms like Vanguard, Blackrock, and State Street, which offer various funds that individuals and families use to save for their retirement. (Firms like Elliott by contrast mostly attract money from ultra-wealthy individuals and large institutions like pension programs, university endowments, and sovereign wealth funds). The mass market shareholders won’t be forced to vote on the controversy anytime soon, because Southwest just held its annual shareholder meeting last month.      

Jordan and his team will perhaps decide to announce new initiatives sooner than planned, rather than wait until investor day three months from now. But would anything it says or pledges to do change Elliott’s mind? That’s unlikely. The activist investor seems intent on dramatic change.

Jay Shabat

Airlines Sector Stock Index Performance Year-to-Date

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