Here’s how a company dies. Not with a bang, but with a baggage fee.
Southwest Airlines, every MBA’s favorite case study in strategic disruption, has abandoned everything it once embraced.
In August, I wrote about their descent, and asked how far they would go. We now know. They went all the way. There is no longer a single thing differentiating Southwest Airlines other than its occasionally comical in-flight announcements.
This is a strategy tragedy.
Not only does it represent the strategic annihilation of an iconic business, but it also demonstrates the fundamental flaw in strategizing for short-term economic results, rather than for long-term, sustainable strength.
Southwest’s failure and capitulation to the worst kind of short-term thinking is an object lesson in strategy.
On Background
In case you aren’t familiar with the story, from the moment it was founded, Southwest Airlines contradicted every sacred cow of the airline industry and created a whole new category of flight travel.
Here are the many ways that Southwest differed from—and beat—the incumbents:
That all went brilliantly for decades. Despite every macroeconomic and competitive challenge, Southwest prevailed as an icon of strategic excellence.
Strategic Starting Status
I often point out that strategy is a creative act. In other words, there are an infinite number of ways to differentiate and gain an advantage. Southwest was (literally) a case study in disruption and differentiation.
Yes, they had low prices. But they created the conditions to have that pricing through extraordinarily creative, operational distinction.
Because their uniqueness ran so deep, pricing was far from their only competitive edge.
Over the years, they became less inexpensive (although never expensive). But they continued to lead by refusing to add petty fees and obfuscation.
So, by 2022, even if their prices were on a par with (say) Delta, customers could trust that the price shown was the price. There would not be hundreds of dollars in additional costs after buying a ticket. Seats, baggage and beverages were already included. And in 2022, you could easily make the case that was enough to keep their edge.
The Dénouement
By 2023, several years of poor management and technical delinquency eroded that streak. Multiple technological failures grounded planes, delayed passengers and incurred regulatory fines.
It wasn’t a one-time issue. Southwest’s scheduling software was obsolete, and their maintenance was less than vigilant.
Those mass delays led to a slow-moving operational mess, spurring an activist investor (Elliot Investment Management) to demand change.
In response to that demand, ostensibly, Southwest created a new strategic plan that they claimed would fix everything.
A New Strategy
At that point, I was honestly excited. My expectation was that Southwest’s management would create something extraordinary and persuade support back from their stockholders.
Given their track record, I imagined they would go back to the drawing board and reinvent a new iconic strategy. I was practically holding my breath in expectation, waiting for the great reveal!
What could it be? A new way of selling their tickets? Unforeseen technological integrations? A novel approach to check-in and seating? Extra value-add for their transparent pricing?
The answer is, I don’t know. That plan was never even considered by Elliot. And, while it was published, it was never presented in any significant way.
But Southwest had that option. They could have created an extraordinary, long-term game-changing strategy; one that would deliver outsized results over the 5 and 10-year time frame.
One that would have convinced all but Elliot and Blackrock to stay the course.
Negotiating From Weakness
Elliot Investment Management acquired its (roughly 10%) stake between June and September 2024. They did so specifically to force change and oust Bob Jordan as CEO. Once in, they did exactly that; demanding sweeping changes on the Board and a new CEO. The operational problems gave Elliot fuel to threaten a proxy fight. Southwest management, fearing the distraction of that fight, agreed to engage with Elliot. But it was less an engagement than a surrender.
Southwest management, fearing the distraction of that fight, agreed to engage with Elliot. But it was less an engagement than a surrender.
And so, in October, the general outline of the agreement was released. Six members of the board, including Executive Chairman Gary Kelly, would be replaced with new ones of Elliot’s choice. The agreement included reducing the board to only 13 members, proportionally increasing Elliot’s control.
With that, Southwest’s management surrendered its strategic oversight to a group of short-term investors who cared little for the future of the airline beyond their own investment horizon.
From there, everything proceeded exactly as one might expect.
Their Bold, New Vision (yes, sarcasm)
When I first wrote about this last year, they had just announced the first of the changes, including ending open seating and converting 30% of all seats to premium. Here’s what I wrote then:
In their announcement they report that 80% of surveyed customers want assigned seats. That’s understandable. When flights are full, the only way to guarantee a good seat is to check in at exactly midnight, thereby securing a spot at the front of the boarding queue.
Assigned seating alleviates that rush, both at check-in and when boarding.
But, dedicating 30% of seats to “premium” is a different thing. It means add-on fees.
From the start, Southwest’s value proposition has hinged on price transparency—and a kind of passenger equality.
It seemed obvious to me that they had pretty much abandoned any pretense of creating a new strategy. But I hoped they might salvage a vestige of their iconic model. Nope.
This week, they retracted their last sacred promise to customers. Baggage will no longer be included in the price of the ticket.
The new comparison chart looks like this.
This is the anti-strategy. They removed every single customer differentiator—and replaced them with …. nothing.
There is no longer ANYTHING unique about Southwest Airlines other than their logo.
Next
The suspense is over. And Southwest is now identical to American, Frontier and (gasp), Spirit. Given that, we can predict their future with a high degree of confidence.
Their stock will rise some. For the short term, the investors can relax. Their equity is safe and will probably increase in value at slightly greater than the rate of inflation.
Of course, that’s assuming that the company makes the necessary corrections to its operations and brings its technology current. If they fail to do that and have more major disruptions or safety problems, there is only one direction they can go: down.
But, if the company continues to operate well, the investors will either resign from the board, content that the company will continue to tick over predictable returns; Or they will facilitate its acquisition, netting a payout to large investors—and little for the rest of the stockholders (including employees). That’s hedge fund SOP.
As for Southwest —its brand, employees and future—they will compete head-to-head with their rivals, having periodic price wars and occasional wins.
Moreover, in short order, the new board members will begin cannibalizing the employee contracts and union relations will pivot from collaborative to adversarial.
That will cascade into safety, maintenance, turnaround time, and kill their on-time record.
Within 10 years, they will have been acquired, and the brand will likely be gone (someone, please check me on this in 2034).
Selling Out the Future
But back in 2024, when Elliot made their demands, Southwest could have created a game-changing strategy that would have been a compelling alternative. If their strategic plan had been sufficiently extraordinary, it would have been worthy of the fight—even justifying a reduction in stock value over the short-term to create greater value in the long term.
Some may read this and argue with me. “They had no choice!”.
Elliot owned about 14% of the stock in 2024. Even with the backing of Blackrock and Vanguard, Southwest could have carried the day—if they had the right story to tell.
In 2024, 25% of their shareholders were individuals, 1.5% employees and the rest mostly institutional. But Elliot had only 11-14% (depending on which moment you count). With a strong enough counterargument, they might have won or averted a proxy war.
The problem is that they never even tried.
They sold the future of one of the most iconic companies of the 20th and 21st century for a quiet life. [Click to tweet]
RIP Southwest.
I find myself fantasizing about potential strategies that might have saved Southwest. Do you have any ideas? What pivot or reinvention could have ensured another 50 years of being a paragon? Share in the comments!
Our collective creativity is greater than the pragmatic rent-seeking of any hedge fund! Please weigh in.
