The Baer Facts Issue 79: Will "if you can't beat 'em, join 'em" work for Southwest Airlines?

Will "if you can't beat 'em, join 'em" work for Southwest Airlines?

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50 years.

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FIFTY YEARS!

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That's how long Southwest Airlines stuck by their unique "no assigned seats" approach to airplane seating.?

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Southwest's proletarian approach to seating was the essence of the brand, and a true differentiator in an industry where all streams empty into the sea of sameness.?

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But Southwest completely switched course, announcing recently:

• all seats will be assigned
• passengers can pay extra for additional legroom (1/3 of all seats)
• red eye flights will be offered (yay?)
• Southwest flights will be available on aggregator websites, like Kayak

"From now on, we're going to be just like everyone else, okay?"

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Why would they do this?

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If you have a defensible difference (especially one you've protected for 50 years), you typically fight like two raccoons in a trash can to keep it. ?

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But Southwest VOLUNTARILY gave it up. Why?

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The only time you unilaterally yield on a core market differentiator is when the costs of providing the difference exceed the revenue created by it.?

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According to Southwest CEO Bob Jordan, 80% of Southwest customers and 86% of potential customers prefer an assigned seat. 4 in 5!

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I'm certain they also have data that shows very few customers choose Southwest BECAUSE of open seating. I suspect their "two bags free" policy is more likely to be the actual preference lever.

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(Note: it is now ONE bag free....)

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Southwest found themselves in the unenviable position of defending an unloved difference-maker, burdened by passenger uncertainty about where they might be able to sit, micro-aggressions in the "line up by numerical order" queue, families being split up on board, and other annoyances.

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Perhaps not coincidentally, Southwest's profit in Q2 2024 was $367 million. Seems solid, but not compared to $683 million in the same quarter a year ago.

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Another behind-the-scenes gravitational force: a $2 billion investment in June from activist group Elliot, which seeks to replace Bob Jordan due to slumping profits.

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This move was jarring enough that the Southwest board created a poison pill provision to essentially bar a forced takeover of the company, followed shortly by this reversal of a foundational aspect of the business model.

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It's weird to conclude that a company that made $12 million in profits per DAY last quarter is scared, but Southwest is, in fact, afraid. And that's when you murder the differentiator.?

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Will it work?

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Southwest is now essentially competing on a level playing field against United, Delta, and American.?

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Is that a fight they can win??

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Maybe?

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They are also adding in-air power plugs at your seat (yes!) and improved Wi-Fi (thank you, because the Southwest Wi-Fi is hilariously terrible).

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They'll also make more money per seat by charging for extra leg room, although some of that will be offset by people not paying $20 to get a low boarding number.?

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What about you? Will you fly Southwest more, same, or less now? Please do reply and let me know. I'll probably fly more, personally.

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There is recent-ish precedent for a brand throwing a longstanding differentiator overboard like a mutinous sailor.?

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Remember 6 years ago, when LL Bean ended their "no questions asked" returns policy after 106 years? (see link for my interview on CNBC about this)

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Similar to Southwest, despite the fact that LL Bean's limitless returns were a core differentiator, too many people were abusing the spirit of the policy, costing the retailer $50 million per year in "abusive returns".

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LL Bean is privately held, so profit information is undisclosed, but top line results suggest their abandonment of their differentiator didn't hurt much, if at all:

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2020 - $1.59 billion up 5%

2021 - $1.8 billion up 14%

2022 - $1.8 billion

2023 - $1.7 billion, pretty solid given retail challenges everywhere

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By 2027 we'll be able to look back to this summer and decide whether Southwest's open seating retreat was the catalyst to a brighter future, or the beginning of the end of a great brand.