Activist Investors Could Be Coming For Southwest’s Famous Open Seating and “Bags Fly Free” Policies – The Average Joe

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    Activist Investors Could Be Coming For Southwest’s Famous Open Seating and “Bags Fly Free” Policies

    Noah Weidner

    June 10, 2024

    Southwest ($LUV) liberated American airports from the tyranny of high fares, bag fees, and seat assignments — but those same features that made it an American mainstay are causing its unraveling. In the 1990s, Southwest won over customers with discount fares, earning the love of regulators who dubbed it “the Southwest effect” for its industry impact. However, after thirty years, the airline famous for doing things differently is beginning to blend in with the crowd.

    Deep freeze: While Southwest might be America’s most popular airline, its financial performance paints a different picture. In 2022, outdated infrastructure led a holiday crisis, resulting in thousands of flight cancellations and billions in losses. Since then, the airline, operating solely with Boeing ($BA) 737s, has struggled to meet growth expectations due to limited deliveries.

    • Compared to competitors like Delta ($DAL) and United ($UAL), Southwest’s reluctance to charge for seating and baggage has hindered its revenue generation.
    • As a result, the airline is contemplating departing from its signature practices such as group boarding, open seating, and “bags fly free” — risking the alienation of its loyal customer base.

    From Southwest to Southworst

    Facing pressures for change, Southwest must act swiftly — or activist investors will do it for them. This past weekend, Elliott Management acquired an 11% stake in the airline, intending to bring in external experts to beef up revenue by introducing charges for bags, seats, and other services.

    • Elliott Management’s proposal includes a leadership overhaul — aiming to replace current executives and board members.
    • They believe this change, coupled with a revised strategy, could boost Southwest’s stock to $49 per share, a 77% premium over current prices.

    This means war: Southwest is already evaluating its operations, but Elliott’s aggressive approach clashes with the company’s culture of internal promotion, exemplified by CEO Robert Jordan and Chairman Gary Kelly. If a compromise isn’t reached, Southwest might find itself engaged in a lengthy and costly proxy battle with its new largest shareholder.

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