Southwest Airlines: end of the low-cost model? The moves of the Elliott Fund

Southwest Airlines, the world's first low-cost airline, could put an end to the low-cost carrier model. Pushing it in this direction is one of its main shareholders, the Elliott Investment Management fund, which has increased its controlling share to 9.7% to allow it to call an extraordinary meeting to renew the board of the American company, including its CEO, Bob Jordan: the accusation is that the company is not adapting to changing times, citing the poor performance of the shares of the Southwest and a "decades-old business model" of the Dallas-based low-cost airline, reasons enough to renew the board of directors and the board. Recently the rating agency Standard & Poor's lowered the low-cost company's outlook to 'negative' citing 'profitability lagging behind other US airlines'. On the stock market, the stock of the company, which carried 137.3 million passengers in 2023, has lost 0.98 per cent since the beginning of the year, performing better than the US aviation index, which has been negative by 7 per cent since January.

The headwinds have been blowing for some time on the low-cost airline, so much so that in July it announced a series of initiatives to try to turn the tide, such as the introduction of premium economy on some domestic destinations, an intermediate route between economy class and business class, to meet the needs of business customers. A choice that overturns the low-cost model, but for Elliot's fund not yet sufficient and asks the company to adapt to the policies of its competitors and abandon a model that has become unprofitable.

Faithful to the low-cost model, Southwest Airlines is one of the last airlines in the world to exclude the payment of luggage in the hold and on board, as well as the choice of seat, which has so far remained free, a policy criticised by the shareholder because in his opinion important resources are lost: it has been calculated that the global luggage turnover is valued at over 33 billion dollars and the ancillary item, which also includes meals on board, is worth about a third of airline turnover.

The current management has so far refused to change convinced that the 'baggage fly free' policy differentiates the carrier from its competitors. The ceo himself has stated that 'people choose Southwest Airlines because we have no baggage fees'. However, news is in sight if a customer survey has been launched to gauge the mood for the introduction of a baggage fee that will inevitably impact the cost of a ticket. Meanwhile, last month it announced it was abandoning its free seat policy for the first time in 50 years, adding premium class and introducing night flights.

For 47 years Southwest has been known to be the most profitable US airline, never ending the year with a loss until the Covid crisis, but this is no longer the case. In the last quarter it reported a 51% drop in adjusted profit to $370 million, despite reporting record revenues for the quarter, boosted by strong passenger traffic. The quarter was difficult for all US airlines due to significant increases in labour costs and higher fuel prices, two of the industry's biggest expenses, which dented profits. And relatively low average fares compounded the damage. Even rival American Airlines reported profits down 44% in the second quarter, despite record revenues.