Southwest Shifts Strategy: Climb Every Mountain?
Southwest Airlines, the third largest airline in the world by passenger volume, has announced the most radical strategy shift in its half-century lifetime. The company was a leader in the development of the low-price budget airline model offering tight single-class seating, no meals and a unique open-seating policy. Although the company started with a triangle of short flights within Texas, connecting Dallas, San Antonio and Houston, they grew to be a nationwide carrier. There was some uncertainty as to whether customers would tolerate longer flights in the no-frills model, but Southwest gradually added coast-to-coast flights and by 2019 added flights to Hawaii. They currently serve 121 destinations with a fleet of more than 800 planes.
Southwest’s minimalist model has depended on flying only Boeing jets and indeed only one plane-type, the single-aisle 737, albeit in many different variants. The pattern of frequent short-haul flights has enabled great crew flexibility, and the short-haul model has meant that many pilots can expect to be back at their home base most days that they are on-duty.
With its unique business model, Southwest achieved an unbroken record of profitability for 47 consecutive years until 2019. Then, everything seemed to fall apart: Boeing had difficulty in keeping up with the delivery of new planes and then the new Max variants were grounded. Southwest became capacity-constrained. In 2022, the antiquated and inadequate nature of their crew-scheduling systems was exposed when storms grounded planes; getting the right crew to the right plane took almost a week. Overexpansion to unprofitable routes eventually led to the abandonment of some new markets. Finally, like all airlines, in 2020, Southwest’s operations were severely curtailed by the Pandemic.
By September 2024, Southwest turned a green eye towards the other major US airlines noting how much money they made from premium seats sold to business travelers. In a shocking move that amounted to a complete reversal of corporate culture, the airline announced that it would reconfigure its cabins to allow for high-priced premium seating and would no longer use open-seating boarding. It also announced that it planned to start offering some overnight flights for the first time.
Will this strategy succeed? An initial reaction is that Southwest is literally ill-equipped to choose head-to-head competition with Delta, United and American. To begin, its planes are not equipped with galleys that can provide equivalent food offerings. Thinking about all the operational changes that will be necessary, the song “Climb Every Mountain” from The Sound of Music comes to mind.
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Firstly, they have 800 planes to reconfigure; even at 20 a week, that will take about a year. Gate areas will need remodeling as well. Then, they will have to add substantial staff at each airport. At the moment, they “load” flights with a single desk employee (competitors need 2 or 3) by famously “outsourcing work to the customer”, that is, it is the passengers who have to line up and get themselves into order according to a number printed on their ticket. Passengers may not take kindly to being charged for seat selection and loyal passengers who had Southwest as “top of mind” will begin to shop around.
Pilots will experience a marked change in their work-life balance if they have to fly overnight and go on multi-day trips. It is possible that some will choose to retire or seek other work. Scheduling maintenance will be more difficult.
As to marketing, this strategy change will result in head-to-head competition with aggressive rivals with an offering that is substandard. Southwest will alienate the loyalty of its best customers. It goes without saying that the firm faces abundant execution risk. That is, even if this was a good plan and rivals “played nice” and didn’t hit back with counter-promotional pricing and very heavy advertising, there are so many pieces of the plan – operational, cultural and psychological – that would have to work perfectly, it is likely to be a very rough two years for the firm.
[Full disclosure, I have owned shares in Southwest but sold on this announcement and have been a loyal frequent flier on this airline.]