In late December 2022, an extratropical cyclone affected large parts of the United States, including the Eastern Seaboard and segments of Canada, bringing adverse winter conditions. These included wind-chill warnings, whiteouts, and significant snowfall, complicating travel for millions. Flight cancellations resulting from what was informally named Winter Storm Elliott were expected, leading to a day’s worth of disruption for many airlines. However, Southwest Airlines faced prolonged chaos due to its outdated crew-scheduling software, resulting in the cancellation of more than 16,000 flights over a span of more than 72 hours. This forced an undisclosed number of passengers to sleep at airports or organize impromptu road trips with strangers to salvage their holiday plans. The situation even became the subject of satire on “Saturday Night Live.”
The airline eventually resumed normal operations, but this year faced a different kind of turbulence in the form of Elliott Management, an activist hedge fund. This organization prompted a significant leadership shakeup at Southwest Airlines. The ensuing situation concerned Southwest’s many loyal flyers, who value the airline for its economy-class-only flights, free bag checks, flight changes, and characteristic sense of humor among flight attendants.
Despite its enduring brand appeal, some investors believe that Southwest’s foundational practices have not aged well with rising industry operating costs. Since the pandemic, the airline has trailed behind competitors financially, with its share price halving since 2021. Elliott Management, which holds an 11% stake in Southwest, initiated a campaign earlier this year to replace CEO Bob Jordan and chairman/former CEO Gary Kelly, while also seeking changes on the board. The hedge fund contended that the existing leadership was too embedded in the airline’s legacy operating and pricing model to successfully adapt and boost revenue.
An agreement was reached lately, avoiding a proxy battle. Southwest consented to bringing in six new board members, including five nominees from Elliott, among them former CEOs from Virgin America and WestJet, and former Chevron CFO Pierre Breber. As part of this arrangement, Kelly, who had led Southwest for 18 years, is set to retire earlier than planned, although Jordan will retain his CEO position.
The incident with Winter Storm Elliott, marked by Southwest’s significant flight cancellations, had lingering effects, including a $140 million fine from the Department of Transportation and a temporary brand impact. This crisis underscored the airline’s cultural insularity and reliance on its past successes, affecting its willingness to invest in technological innovations. Southwest’s leaders were historically resistant to change, often dismissing suggestions, such as charging for checked luggage, despite other airlines generating significant revenue from such fees.
Observations from business experts highlight that Southwest’s strategies, which once propelled its growth, became stagnant as market dynamics shifted. As consumer preferences leaned towards international travel and premium services post-pandemic, Southwest lagged without adapting accordingly. In contrast, its competitors capitalized on these changes by modernizing offerings.
Moving forward, Southwest faces the challenge of refining its understanding of customer segments while navigating labor costs and competitive pressures within the airline industry. Although the airline has started implementing changes, such as exploring new seating arrangements and forming its first airline partnership with Icelandair, these steps come as a response to evolving market demands and operational pressures. However, analysts suggest that airlines like Southwest might not hold full control over their economic destinies in the current environment.
