Openness to change, not resistance, is the guiding light that has guided Southwest Airlines as it grew from a scrappy regional carrier to a national leader. As the airline industry goes through turbulent times, Southwest must continue to make smart changes while weathering storms that could throw the company off course.
Southwest CEO Bob Jordan recently made a novel but necessary decision: moving from Southwest’s signature open seating system to assigned and premium seating. This deviates from a practice that is at the heart of the airline’s brand, but it is in keeping with Southwest’s agility, as embodied by its founder, Herb Kelleher, with the famous phrase, “If you don’t change, you die.”
Were Kelleher still with us today, he would be urging our industry to respond to turbulence with change. We are living through challenging times driven by changing customer demands, a troubled supply chain and other market pressures.
At United Airlines, our team recognized back in 2017 that our customers preferred a more segmented product rather than a one-size-fits-all offering. We responded by introducing a variety of fares, including Basic Economy.
Being the first to get through the door stumbled us. But segmentation proved to be an amazing key to our success. By differentiating our product and appealing to more customers with different price points, we invited them to customize our service.
Meanwhile, industry challenges have forced low-cost carriers like Spirit and JetBlue to switch to premium seating to serve the market and generate revenue. Southwest, for its part, is wisely making similar changes to meet customer demands while committing to making the transition in its signature style.
But what about the shareholders?
It’s no secret that Southwest is under fire from activist investor Elliott Investment Management. Elliott, who filed for an 8.2 percent stake in Southwest, shrugged off the personnel changes, calling them “more than a decade too late” and remained committed to replacing the majority of the board and executive team. But aside from a leadership change, Elliott has so far offered no ideas that suggest he knows how to hit the lofty $49 per share price target within 12 months that he has promised for Southwest if the company gains more control.
I know from personal experience that investors, when working with company leadership, can play a useful role in driving positive change. But lasting change with long-term benefits is hard to achieve in this industry – and the pursuit of a short-term share price increase can have long-term negative effects on brand, business and company culture.
A major leadership change might benefit an investor looking to quickly turn around their ownership position, but it could hurt Southwest in the long run. It also ignores other successful changes at Southwest that go well beyond seat allocation.
Southwest, for example, quietly invests around $1 billion annually in modernization, including a major cloud migration effort to improve system reliability and resilience.
It’s easy these days to dismiss these investments as minimum commitments, but they are notoriously complex and extremely difficult for a major airline to pull off. A testament to the quality of Southwest’s work is that the airline weathered the CrowdStrike outages better than its competitors, despite false reports that it was running Windows 3.1.
While such major changes don’t happen overnight (and details remain on exactly how the technology investments and assigned and premium seating initiatives will be implemented), I’m confident that Jordan has the right strategy and understanding of Southwest’s position in the market to meet the needs of customers and employees.
Trust me: Running an airline is a complex undertaking that requires more than just financial acumen. It requires a deep understanding of the industry, operational expertise, and a commitment to the company’s core values. But it doesn’t require changing the CEO just because progress has been slower than Wall Street would like.
Replacing executives at this critical time could destroy the momentum and stability Southwest needs to successfully implement these changes. Leadership transitions rarely go smoothly, and finding a new CEO who understands the unique culture and business model of an airline like Southwest would be a major challenge.
I know from personal experience that leading Southwest while I led United has made the airline a strong competitor in the industry. Southwest has overseen profound changes such as acquiring AirTran Airways, expanding service offerings and strengthening the airline with an industry-leading balance sheet. Jordan continues Southwest’s transformation efforts and maintains its employee-centric culture, much to the delight of millions of passengers each year.
As I said, Southwest needs a balanced approach. That means retaining Jordan’s expertise, who knows the company very well. That will provide time and opportunity to implement and reap the benefits of the necessary changes, many of which are already underway and could include the possibility of a settlement with Elliott.
Having weathered similar storms, my advice to Southwest and its shareholders is to stay the new course, listen to customers, and make smart changes. Make no mistake: replacing experienced leaders now guarantees a hard landing—the last thing airlines need in turbulent times.
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