Southwest's Risky Strategy Change

I'm a little bit late to the table on the Southwest Airlines changes, but let's talk about them for a minute. So the real challenge when we start looking at these changes, and in particular the boarding process change, is that this starts to mess around with Southwest's differentiated strategy. By the way, if you want to read a really great chapter on differentiated strategy, read the book Three Hags, so it's the number three HAG way. By Shannon Susko, S-U-S-K-O.

Great chapter on differentiated strategy. And, you know, one of the things she points out in there is that frequent departures is one of their key differentiators. And those frequent departures, when you look at Southwest behind the scenes, they still have, I believe in 2024, the fastest aircraft turnaround time in the industry. So, you know, being able to board the way they do gets their wheels up.

And again, that's the one phrase strategy of Southwest for those who don't know. They know the more they can get that aircraft in the air those shorter point to point routes than the routes than the more money they make routes, routes depending on where you're from, the more profitable they become. Now, if you look at some of Southwest's greater challenges over the last couple of years, a lot of them are operational in nature. So, you know, and when you get into operations issues, you have to back up even a step further and go, okay, well, who are the people in the seats?

So, you know, if I was this private equity company, which I believe is eligible, it's Elliot. Investment management who came on the board last year, got several seats, and this was one of the key things they wanted to push with the new CEO, which is the changing the boarding process so they could theoretically charge more on a per seat basis. And of course, removing the free bags. If I was Southwest, I probably would have worked harder to get the right people in the right seat, number one, and fix the operational issues that led to, having now a new aircraft fleet that people don't have confidence in with the 737 Max.

I'd be putting a lot of PR behind that. I'd be fixing my operations issues, my people issues behind the scenes. I'd be fixing the scheduling system that led to several issues with aircraft over the last couple of years. Pilots getting transferred in timely manner, that sort of thing.

Before I toyed with the differentiated strategy. So I think I saw somewhere where last year, the turnaround time with Southwest was like 49 minutes or something to that effect. And it used to be faster, but you know, with everything happening, it's still the fastest turnaround time there is. And what happens if that gets pushed out by five, six, seven, eight minutes per aircraft?

You got to be charging a lot per seat to be able to make that up. And then at that point, your charges push so high that you're no longer a low-cost carrier. And a lot of their flights were pushing it anyway. The prices were coming up so much that it wasn't becoming worth it.

So I've been a Southwest customer a long time, but if you look back at the history of them, they were kind of the king of differentiated strategy. Boy, they're very different. At one point, three times more valuable than any carrier. They were the king of differentiated strategy under Herb Kellerher.

And interestingly enough, you know, that strategy, you know, if you look back kind of the history of them, they had taken the roots of all that strategy from another airline and planted it and built it as their own. They took the entire strategy and taking, having that entire strategy that was built out. So again, you can copy, I guess, but ultimately you can only copy if you can take every part of the strategy and put it in place. If you look at the history of Southwest, you know, there are people who tried to compete with them.

And there was not, there have not been very many successful models in North America. One of the most notable ones is Continental Light, and you can read about this in that three-hag wave book I mentioned earlier. But Continental Light tried to just peel portions of the Southwest strategy away and ended up trying to fulfill on that with its full service amenities, which basically led to unprofitability or an unprofitable airline. CEO lost their job, crazy stuff.

So what you find is that getting a differentiated strategy in place is very difficult and you've got to be very careful because if you do something to harm it, you know, it's not just you get to charge more per seat, it's that the entire value of what you produce might go away. So, you know, not to say it'll necessarily happen, but it is a concern. I think it's worth watching very closely as Southwest tries to navigate this. But, you know, definitely some changing waters in the aircraft industry, in the airline industry.