Southwest is getting walloped – and at the worst possible time as it revamps its business model. — Bloomberg
MORE pain for low-cost airlines is coming as President Donald Trump attempts to reorder global trade with massive tariffs, making passengers who fly toward the back of the plane nervous about their jobs and household finances.
That’s the takeaway from airline earnings conference calls as executives describe wilting demand for “main cabin” airfares, which began in February and has continued into the current quarter.
The hit is coming from lower-income leisure travellers while demand for business and international passengers – generally those who pay for premium seats and services – is holding steady, for now.
This is putting the squeeze on those airlines that cater more to the budget-minded domestic traveller, including Frontier Group Holdings Inc and Spirit Airlines Inc.
Most critically, Southwest Airlines Co, which started as a budget carrier in the 1970s and became the largest domestic carrier by offering no-frills, excellent service, is getting walloped – and at the worst possible time as it revamps its business model.
The big three airlines – Delta Air Lines Inc, United Airlines Holdings Inc and American Airlines Group Inc – can afford to cut prices on main cabin fares to fill their planes because they have a profit cushion from those higher-margin international and corporate flyers. The good news for shareholders is that the airlines are curbing capacity to adjust to the weaker demand rather than slugging it out with airfare wars.
Still, airline stocks have been crushed. Flying can be curtailed quickly in an economic downturn, and it’s impossible to know where Trump’s tariff trip lands.
Some US companies are postponing investments, and others are cutting costs to cope with the higher cost from tariffs, both of which make workers uncertain about their futures.
Federal government employees have drastically cut back on flying as the Department of Government Efficiency scours for cutbacks.
Perhaps the fresh carnage from the pandemic has made investors more trigger-happy on airline stocks.
Delta and United both have declined about 30% so far this year compared with a 7% drop for the S&P 500 Index.
American, which was hurt by a fatal accident of an affiliated regional operator in January, has slumped 45%.
Frontier and JetBlue Airways Corp, which have both struggled to return to profitability since the pandemic, have dropped 55% and 50% this year, respectively.
Spirit just emerged from bankruptcy and doesn’t trade. Alaska Air Group Inc, which regained profitability in 2022 and recently acquired Hawaiian Airlines, has declined 36%. Southwest has weathered the storm much better, with a 21% drop.
Downturn in US demand
Even so, it’s a delicate time for Southwest to face a sharp downturn in US demand. The airline, founded after Texas lawyer Herb Kelleher and a partner sketched out a budget-airline plan on a cocktail napkin almost six decades ago, is just now making historic changes to its service model.
The airline is breaking lots of tradition by adopting assigned seating, creating a multi-zone cabin with large seats and more leg room, adding overnight flights and – perhaps the biggest shock to the Southwest culture – charging for checked bags.
Southwest gained a loyal following as it morphed from a low-cost airline that flew out of secondary airports, such as Love Field in Dallas and Midway in Chicago, to haul more US domestic passengers than any other airline.
The airline never declared bankruptcy like its larger peers and had an unbeaten streak of profitability from 1973 until the pandemic practically shut down commercial air travel overnight.
Flyers’ attitudes changed after the pandemic.
They are now more willing to pay for comfort, entertainment and perks. This desire for premium treatment coincided with large investments that the large airlines had made to upgrade seats, add onboard screens and internet and build modern lounges at airports to cater to the well-heeled. The big three, especially Delta and United, segmented the cabin and stopped the old-style upgrades that gave away their premium services.
Southwest left out
Southwest was left out of the premium bonanza, and its margins suffered at the hands of the big three, which could afford to compete aggressively for the economy passenger because they captured more revenue at the front of the plane.
Elliott Investment Manage-ment noticed and took a large stake in Southwest last year with the goal of shaking up management and the business model.
Southwest is just about to carry out this overhaul. Next month, it will introduce a multi-zone cabin with different fares and start charging for checked bags. At the beginning of next year, flights will have assigned seats and premium sections.
Premium travellers
This chase for premium travellers could end up alienating those longtime customers who cherished the quirky culture that fuelled Southwest’s growth.
Chief executive officer Bob Jordan, who successfully fended off Elliott’s demand that he step down, did a 180-degree turn on Southwest’s free checked bags after defending the policy last year as a brand-loyalty magnet.
The cultural upheaval includes the workforce, with the exit of longtime executives such as chief financial officer Tammy Romo, and the first involuntary layoffs for the airline involving 1,750 leadership positions. — Bloomberg
Thomas Black is a Bloomberg opinion columnist. The views expressed here are the writer’s own.
