Southwest Needs Both Wings to Fly

A battle is raging for the heart and soul of Southwest Airlines, one of the world’s most iconic and revered brands. In July, Southwest shocked many observers by declaring it was upending its open seating policy, moving to a more conventional model of assigned and premium seats. As the fog began to clear from this announcement, deeper turbulence was detected. The source was Elliott Investment Management, an activist hedge fund seeking to remake Southwest to maximize shareholder value, even at the expense of the company’s deeper values, which have lifted the brand for over 50 years. The battle playing out in Dallas raises important questions for us all. Can profit and purpose work together, or do they inevitably pull in opposite directions? 

Lifting off with Heart

Southwest Airlines Co. (NYSE: LUV) traces its history to a hotel bar in San Antonio, Texas, in 1967, when two men imagined a carrier linking Dallas, Houston, and San Antonio with low-cost, reliable, and amiable air travel. Present that day were co-founders Rollin King and Herb Kelleher, the latter of whom would go on to earn a reputation as one of the savviest and most fun-loving CEOs in American business history. Gritty and resilient to the core, Kelleher and his early colleagues faced intense opposition from competitors, most notably Braniff, Trans Texas, and Continental Airlines. Not until 1971 through a ruling by the Texas Supreme Court was the airline able to take flight, fulfilling its express purpose — “to democratize the sky” — through what Kelleher planned to be friendly, dependable, and economical air travel.

By building a big-hearted culture that expressly values its people (employees and customers), Southwest developed a point-to-point, rather than hub-and-spoke, transportation model that expedited service and ensured reliability. A point-to-point network connects cities directly, even on short trips, without having to connect and change planes at airline hubs. Developing a reputation for employee and customer care — witty and friendly service on the ground and in the sky, no change fees, free checked bags, and flight credits that don’t expire — Southwest grew steadily, differentiating itself in the marketplace as the reliable, cost-effective, and most fun-loving airline. Today Southwest employs over 74,000 people, operates at 117 airports in 11 countries, and completes 4,000 daily flights during peak travel periods. In 2023 alone, Southwest served 137 million customers. Its model is so trusted that it carries more air travelers nonstop within the U.S. than any other airline. Even more noteworthy, Southwest has never issued involuntary furloughs or layoffs, which is astonishing given the general volatility of the industry, including massive downturns associated with the September 11, 2001, attacks and the Great Recession that followed in 2007.

Until two fatal crashes universally grounded all Boeing 737-MAX planes in 2019 — a major problem given that Southwest only flies 737s — and the coronavirus shutdown soon after, the company had 47 consecutive years of profitability. Due to these and other recent difficulties, the airline has lost ground to competitors in customer satisfaction, profitability, and market share, making it susceptible to increasing shareholder pressure.

Elliott’s Proposed Flight Plan

Ironically, the air carrier that has consistently differentiated itself on passion and heart is in the battle of its life with Elliott Investment Management, a hedge fund that now has a $2 billion stake in the business and owns more than 10 percent of Southwest’s common stock. Elliott has aggressively positioned itself to take control of the company’s board to implement wide scale changes, including ousting the current CEO, Bob Jordan, a 36-year Southwest veteran. Rather than honoring Southwest’s time-tested values, Elliott seems to be ignoring them, making shareholder wealth their sole objective. The proxy battle has played out publicly like our coarsening political landscape. Responding to Elliott’s most recent attack, Southwest conceded that six current directors will retire in November 2024 with four new replacement appointments to follow, up to three of which will come from Elliott.

Gaining Higher Altitude

Knowing the deeper reasons for enduring success, the world’s best organizations hold on to their core values, even to the point of being punished by other stakeholders for adhering to them closely. Company culture guru Patrick Lencioni, in The Advantage, tells the thinly disguised story of Southwest’s core value of humor.

A great example of this occurred when a frequent flyer wrote to the company’s CEO complaining that a flight attendant was making jokes during the preflight safety check. She was upset that the employee was trying to be funny while he was talking about something as serious as safety.

Now, most CEOs would respond to that complaint by thanking the customer for her time and her loyalty to the airline and assuring her that safety, was, indeed important to the organization. They would then promise to look into the matter to make sure that the flight attendant adjusts his behavior to avoid offending any other passengers who could be uncomfortable with the jokes. That would be reasonable enough, I suppose, unless your core values have to do with humor.

Well, the CEO of this company took a different approach. Rather than apologizing to the customer and asking the flight attendant to moderate his behavior, he wrote her a short note with three words on it: “We’ll miss you.”

Author and researcher Jim Collins also reminds us of the primacy of core beliefs by the world’s best organizations. In Built to Last, Collins invites readers to embrace what he calls clockmaking — the duality of “preserving the core” while “stimulating progress.” In his words, 

Over time, cultural norms must change; goals must change; competencies must change; administrative policies must change; organizational structure must change; reward systems must change. Ultimately, the only thing a company should not change over time is its core ideology—that is, if it wants to be a visionary company.

Too often, businesses exchange their heart and soul for the adrenaline rush of meeting short-term market expectations. The profit maximization model has wrecked many iconic organizations, luring companies away from what they do best and their deepest reasons for doing it. Southwest finds itself facing these common headwinds. Will it hold to its core or succumb to the forces that seek higher returns for investors at any cost? If the former, profit and purpose must find a way to work together — profit as a means to achieve a higher end or reason for being. In Southwest’s case, profit can be likened to blood pumping through the company’s heart to help it achieve its mission “to connect people to what’s important in their lives through friendly, reliable, and low-cost air travel.”

In a September 10 letter to its shareholders, Southwest’s board chair Gary Kelly wrote the following:

Now is the time to change. It’s time to shake things up, not just stir them a bit. The wisdom comes in knowing what to change and what not to change. We know that changes are required to some of our historic business practices. … Maintaining the core, the essence of Southwest while transforming the business is not mutually exclusive. Taking care of our Employees, while taking care of our Customers, all while creating value for Shareholders are also not mutually exclusive aspirations. All are important.

As my friend and former Boeing executive, Al Erisman, likes to ask, which wing on an airplane is more important, the right or the left? Profit and purpose are not mutually exclusive. They each have a job to do. We need both to fly. Let’s hope Southwest, and the hedge fund that seeks to reconstruct it, remember.