With the announcement that Executive Chairman Gary Kelly will step down, Southwest Airlines has caved into activist investor Elliott Investment Management. But Southwest Airlines must zealously guard against a “New Coke” disaster as it seeks a return to profitability.
Gary Kelly Will Step Down At Southwest Airlines In 2025
Gary Kelly takes on the “venerable” title at Southwest:
- He has spent 38 years at the company
- Since 2018, he has been Chairman of the Board (after the retirement of Herb Kelleher)
- From 2004 to 2022, he was Southwest’s CEO
During that time, Southwest has grown and until recently has been consistently profitable.
But with growth stalled and profits elusive, Elliott Investment Management has increased its stake in the Dallas-based airline and become an activist investor.
Among other things, Elliott has demanded a leadership change and fresh blood on the board. Although Southwest Airlines is already in the process of making changes including adding redeye flights and assigned seating, Elliott has made a lot of noise and demanded top leaders to step down.
Now Kelly will step down next year. Additionally, six current directors will voluntarily step down after the November board meeting. The vacancies will allow Elliott to push its preferred candidates on the board.
It appears there was some strategy at play: after a meeting with Elliott yesterday, Kelly may have sacrificed himself to protect CEO Bob Jordan:
The Board and leadership of Southwest unanimously support Bob Jordan as CEO. Bob has a proven track record over decades and, most importantly, he has what it takes to lead Southwest through a significant transformation and usher in a new era of profitable growth, innovation, and industry leadership. Bob is a hands-on, detailed, and insightful thinker with a deep knowledge of this complex industry and business. More importantly, he understands Southwest, our Culture, and our unique brand.
Will Elliott accept Jordan as CEO or continue press for his ouster as well?
My Prediction: New Coke
When I think about Elliott taking over Southwest, I think about the New Coke disaster in 1985.
I view Elliott as the sort of firm that comes in and ruins companies out of a lust for short-term stock gains: a trojan horse. I have no confidence in its ability to turn Southwest around. Quite the contrary, I think it will deeply harm Southwest the way Eddie Lampert and his investment company raped and pillaged Sears and K-Mart, destroying those storied brands through the trope that there was but one path to avoid destruction.
Southwest Airlines is about to change in a structural way and not all the changes are bad: the introduction of redeye flights is a great thing. Assigned seats will be attractive to many customers. There is no doubt that the status quo was not working.
But when you destroy the business model and make Southwest no different than a legacy carrier, it cannot compete. Its route network cannot compete and its differentiators like generous legroom and free checked baggage are not just gimmicks, but fundamental parts of the culture and draw of the airline, which is often more expensive than its competitors.
I fear Southwest will fall victim to the “New Coke” syndrome and will find its changes, if too aggressive, will drive even more people away, reduce revenue, and ultimately exacerbate the problem, not solve it.
Southwest is a solid company with a tried and tested business model. Turning it upside down is highly unlikely to produce sustainable results, even if Wall Street likes the short-term changes (sometimes, we foolishly equate progress with busy work).
CONCLUSION
Gary Kelly will “voluntarily step down” at Southwest Airlines after a meeting with Elliott, but is pushing for Bob Jordan to remain CEO. The carrier is preparing a major change to its business model that will be announced later this month and several board vacancies should allow Elliott Investment Management more influence around the table.
But Southwest Airlines must be careful not to fall prey to the “New Coke” syndrome. Change cannot be so drastic that consumers lose what they love and has made Southwest distinct: Southwest cannot just mimic others and expect to succeed.
CEO from 2004 to 2002? Hardly a “venerable” career length! LOL
It was off by a century. 1904-2002.
What a difference a numeral makes!
JetBlue went down the “New Coke” route and became lost en route as it lost its distinction from the legacy major airlines that rushed forward drip-pricing (aka “unbundling”) in the market. Now it’s going to happen with Southwest where some traders (aka “investors”) hoping for a quick financial return will push it to do what its industry peers do.
Not good for consumers, including even those of us who rarely or never fly Southwest when flying within the US/North America.
Actually, the NEW COKE disaster as you call it, was one of the most brilliant marketing schemes EVER. It was never intended to replace COKE. It was intended to jolt the consumer, shock the bottling system and defend against clever marketing from Pepsi. Pepsi has still not recovered from that. And it has been 39 YEARS. I am not saying WN is doing great things, but the NEW COKE comparison fails to understand the real strategy (and success) behind it.
Look, I’m not an MBA student, but I think you give Coke far too much credit. Yes, it worked out for them ultimately by reverting back to what customers loved (and reminded them of that), but that was not the plan from the start. The New Coke formulation was predicated by panic over Pepsi’s rise, not some grand strategy to bait customers over a 10-year period. In essence, it sounds like you are hoping that Southwest will dance on the cliff of destruction in the hope that consumers will realize and embrace what they once had…and that’s a dangerous game if Southwest falls off the cliff.
I worked for Coke for 20 years and know the guys in marketing during that time in Atlanta. Trust me if I tell you this was not a failure. Having said that, I have no opinion on WN, its board or its investors. I just know marketing and Coca Cola.
There’s a snopes page about the “new coke wasn’t a mistake” conspiracy theory. It’s not a new conspiracy theory.
I’ll say I don’t believe the conspiracy. Conspiracies that involve a lot of people keeping a secret for decades for no obvious reason generally seem too improbable to be believed, and this one is no different.
So, the idea is that Coke had a marketing plan that was absolutely diabolic genius, but yet the people at the top of this conspiracy- who otherwise are not shy about gloating about their business success- executed an absolute masterstroke in deception and manipulation, and then years and even decades later denied the existence of their own success? Why did they take this secret to their graves?
Why aren’t there folks who have a verifiable history of working at the top levels of Coke’s marketing arm in the 1980s the people who are telling this story in a clear and believable way. Instead it’s a random anonymous person on the internet saying “trust me, it’s true”
Has anyone at Elliott flown Southwest? I’ve read stories where they want to charge for bags and other stuff but have they seen the fares that Southwest charges?
The only reason I’ve been flying them this year is that we got the companion pass so essentially tickets are 2 for 1. If you look at their fares and compare them to other airlines they are almost always higher but some people can justify that if they have bags to check but if you are someone who never checks bags Southwest fares are consistently higher in my travels.
Charging for bags would just make them even less competitive. I’m assuming the fares are high due to the large contracts they have given their employees.
I’m on the fence with regards to open seating. Unfortunately the turnaround times for Southwest isn’t what it was and they seem to have a lot more delays. I’ve had 2 flights delayed due to crew missing (arriving on a delayed flight) and another delayed due to aircraft running late.
Of course flying now is just a mess. Too much trying to optimize profits and overpaying employees has led to worse and worse conditions in flying (delays, cancellations, old equipment, etc.).
Elliott and others like him are basically financial vampires. They come in, suck companies dry and leave them husks of their former selves. They add no value and simply take whatever value the company might have had to the market, the economy, and smaller shareholders for themselves. They do nothing for the economy except line their own pockets and those of their wealthy investors.
Even worse, they do all of this while avoiding paying capital gains taxes through the carried interest loophole. They are a blight on our economy.
I should say I don’t really care about Kelly or Southwest, I just find Elliott and their ilk to be problematic.
Gary Kelly has had a great career, and it seems to me that he is genuinely well liked by his competitors, especially his friends over in Ft. Worth. That’s admirable. But he’s going to step down at age 70. I think the world is a better place when these old timers step aside and let new people in. I’m not saying getting rid of him won’t be a mistake, but I’m tired of letting old people stick around for way too long. He’s got all the money and the respect he needs. Enjoy retirement for goodness sake!
No, no, no. I’m so against term limits of any kind.
While I agree with your overall message, it’s 2024. Can we please purge “rape and pillage” from our business stylebook?
I hear you.
Stripping Southwest of everything that makes it unique will be a disaster. Give people a choice between flying Delta or Delta and they will choose Delta every time.
Indeed. What is Southwest’s differentiation if not for it being a sort of “uncarrier” in the face of a never-ending onslaught of “unbundling”? That it has no real frequent flyer partnerships or network alliance partnerships with other airlines and has a more limited route network — and this point of differentiation is not going to help it attract and retain customers, increase revenue and boost margins for the airline over the longer term.
EIM is looking to make a relatively quick and easy buck for itself even at the risk of gutting Southwest’s long-term economic viability as a competitor in the markets which the airline serves. EIM is not bringing any sort of cutting-edge and novel airline operational expertise to transform Southwest into a super-competitor. EIM will play from the same playbook that it and other “investors” like it have done already — and when such “investors” mess up a company, it’s really not much or any skin off their own backs since on tax-adjusted and risk-distribution bases it’s not a loss as much as it’s just an offset that doesn’t really do so much to harm the net results for the “activist investor” who gets the initial big bite of the apple and is counting on a greater fool buyer to be around when the “activist investor” jumps ship(s).
That’s only true if the things that make it unique remain competitive and meet current expectations in the market, which WN increasingly isn’t. Labor costs, particularly for skilled positions like pilots and mechanics, have increased significantly due to labor market changes, and Southwest can’t bear those without monetizing areas that they currently aren’t. Being “unique” does you know good if it isn’t offering sustainable revenue and is increasingly not what customers want.
I think many are underestimating how many customers book away from Southwest based on seating policies alone. And the longer the flight, the more this matters. With Hawaii and transcons and Caribbean and red-eyes, this isn’t them flying DAL-HOU or OAK-BUR. Short of a BOGO Companion Pass, how many people are going to risk flying BWI-XXX-HNL with open seating rather than booking any of the other carriers that will get them there in 1 stop with confirmed seats together for 10 hours?
I’m not too worried about Southwest’s ability to compete. Their route network is very unique with flights that others don’t have and/or strongholds at secondary airports in many markets. The secondary airports is where they currently have exposure, since people weigh the inconvenience of flying WN with the inconvenience of driving to another airport where they can buy a seat and extra legroom.
I think people are underestimating how much this puts WN flights in play that weren’t even up for consideration under the open seating policy. People traveling across Dallas or Houston to use the other airport, or from Burbank to LAX or the East Bay to SFO, the WN avoidance factor is real.
The Elliott imposition of proposed changes at Southwest is a bad dream. Firstly, there have indeed been mistakes and blunders made by Bob Jordan & Co. The meltdown of Dec. 2022 & Bob’s failure to appear to testify before Congress to give testimony regarding the meltdown is a very bad look. The company “survey” that supports the change to assigned seating was not conducted thoroughly. The majority of A List & A List Preferred customers, as well as long time shareholders, were not contacted or included on the survey. Every one in that group should have been included. If they had been, the results would not have come close to 80% in favor of assigned seating. The same scenario is playing out regarding checked bag fees.
Notwithstanding the above comments, Elliott’s misdirected approach serves to destroy Southwest Airlines. This company was founded with a concept of appealing to the “common man or woman”. Air travel was made possible for those who could never afford to fly and who were subjected to poor service and high fares protected by the now defunct Civil Aeronautics Board. Whole new classes of passengers were created and the landscape of the airline industry was revolutionized entirely by one carrier – Southwest. It was a culture and philosophy that operated contrary to the “feed the rich” attitude of the legacy carriers at that time. It’s where open seating and “bags fly free” came from. The majority of Southwest passengers today are passionate toward that philosophy and culture.
Elliott is determined to have Southwest become a follower, never a leader. They also aim to change Southwest to a hub and spoke carrier from a point to point carrier.
Elliott’s proposed board of directors candidates do not have a tenure established long enough with one airline to prove consistent growth & profitability and to manage through reversing financial environments long term.
I, for one, intend to vote “no” for Elliott’s proposed nominees to the Southwest Board.
This ain’t just New Coke coming on, it’s TAB.