Is Southwest's customer-centric legacy crashing? Elliott Investment demands course correction

For decades, Southwest Airlines has been the gold standard for customer-friendly, efficient air travel. Who hasn’t enjoyed Southwest flight attendant hospitality with smile-inducing comments like this, “We’ve done extensive research that shows Louis Vuitton, Prada, Dolce and Gucci all can in fact fit under the seat in front of you. Besides, if those bags were real, you wouldn’t be flying Southwest.”

However, recent events suggest the airline's once-vaunted customer focus has lost altitude. As Elliott Investment, now Southwest's largest shareholder, sounds the alarm about outdated systems and ignored warnings, I wondered: Has Southwest's customer-centric approach been grounded by a failure to embrace modern technology?

TLDR: Southwest's outdated technology and disconnect between frontline staff and management have led to declining customer satisfaction and operational efficiency. As we saw in the Starbucks story, operational efficiency and employee feedback are key drivers of a customer’s willingness to buy again. Elliott Investment is pushing for substantial changes to modernize systems and refocus on customer value. After a decade of being penny-wise, pound foolish, Southwest must heed these calls to regain its industry-leading position. Skip to the end for operational takeaways or keep reading for the full story.

Southwest Performance

Founded in 1967, Southwest Airlines revolutionized the industry with its low-cost, customer-first approach. The company has had only six CEOs in its 57-year history, a testament to its stability. However, recent financial performance has been concerning. In 2022, Southwest reported its first annual loss in nearly 50 years, and its stock price has fallen by more than 50% since early 2021.

Enter Elliott

Elliott Investment Management, now Southwest's largest shareholder, has launched an aggressive campaign for change. In their presentation "Stronger Southwest," Elliott states, "Southwest's disappointing performance over the last several years highlights the need for new leadership and an evolution of the Company's strategy." They argue that the airline's "dated commercial strategy" and "systemic failure to modernize" have eroded its once-strong market position.

Southwest's December 2022 operational meltdown, which stranded over 2 million customers, revealed significant cracks in its customer service armor. This incident highlighted a growing disconnect between Southwest's customer-centric rhetoric and its operational reality. Elliott's presentation pointedly notes, "December 2022 meltdown stranded over 2 million customers and drove 30%+ share price underperformance relative to peers over 2 months."

According to a viral Reddit post from a long-time Southwest pilot, the airline's frontline employees have been warning management about operational issues for years.

A half dozen small scale meltdowns occurred during the mid to late 2010’s. With each mini meltdown Leadership continued to ignore the pleas and warnings of the employees in the trenches. We were still operating with 1990’s technology. We didn’t have the tools we needed on the line to operate the sophisticated and large airline we had become. We could see that the wheels were about ready to fall off the bus. But no one in leadership would heed our pleas. - Southwest Pilot

This aligns with Elliott's assertion that "Southwest's frontline employees are recognized for their best-in-class customer service" but are hampered by outdated systems and poor management decisions.

Southwest vs Delta

"Southwest has substantially underperformed peers and the S&P 500 over all relevant time periods,” says Elliott. And indeed, while Southwest has struggled, competitors like Delta Air Lines have made significant strides in customer satisfaction through a combination of technological investment, estimated at $1.9 billion in 2023, and innovations including biometric boarding, stream to seatback and soon home to airport “air taxi” transportation. For me, the idea of skipping traffic and not wading through a sea of humanity to get to my gate sparks a bit of joy.

I have not seen Delta’s data first hand, but rumor has it that Delta Airlines strategically targets high-value consumers by enhancing amenities to attract premium fare-paying passengers, especially business travelers who contribute significantly to airline profits. Based on the number of times I’ve been hooked by the “for just $30 more you can be seated in premium economy” pitch, I would agree there’s decent customer data mining behind the scenes.

Southwest’s First Chief Customer Officer

In November 2023, Southwest Airlines appointed Tony Roach as its first-ever chief customer officer, a move aimed at improving customer experience after the disastrous holiday meltdown of 2022. Roach, a Southwest veteran with over two decades of experience at the airline, does not have a specific technology background. I found this jaw-dropping considering the data mining skills of the competition – not just Delta, but American Airlines and their secret customer score.

His appointment is part of a broader restructuring of Southwest's customer experience division, which now includes about 4,500 staff members. While it's still early to assess Roach's impact, he has emphasized that regaining customer trust is his top priority. He points to rebounding trust scores as a positive sign. In June, Southwest proudly posted that the company had recovered from the 2022 outage with #1 customer satisfaction scores for economy class.

"This recognition underscores our commitment to our Customers," said Tony Roach, Southwest Airlines Senior Vice President & Chief Customer Officer. "Our product offerings, unrivaled flexibility, and world-class Hospitality give Customers more value for their money and drive industry-leading loyalty." Trust is an important foundation, but I do not see any financial impact in this statement. Remember the point of customer equity is to measurably improve both financial impact and customer happiness.

Southwest’s Silent Killer

When customer data is used correctly, it empowers the front line to make better decisions (American Airlines) or identify and drive new accretive innovations (Delta Airlines). Southwest's current struggles stem from a misalignment between its customer-centric values and its operational capabilities. The first stage of being customer-centric is not to entertain your customers, but to listen and understand them. The second stage is to learn from them through a series of well-formed experiments. And the final is to enter the breakaway leadership phase through innovation. As long as Southwest cannot deeply and clearly understand its customer base, it will remain a silent killer.

Elliott's presentation supports this view, arguing for a "Comprehensive Business Review" to "modernize Southwest's strategy and restore best-in-class performance." However, unless Southwest can adopt a start-up style growth mindset and make an impressive technology transformation centered first on operations and then quickly on customers, I think we’re looking at a 10-year turnaround.

And here’s my tip: when it seems that Southwest “magically” know things about you – or something you’ve been thinking about serendipitously shows up in your mailbox or in your feed – then you’ll know the Southwest turnaround is on its way.

Operational Takeaways

1. Prioritize foundational technological upgrades: Invest in modern systems for scheduling, customer service, and data analysis to improve operational efficiency and basic customer experience.

2. Implement data-driven customer segmentation: Use advanced analytics to identify high-value customer segments and tailor services to their needs.

3. Bridge the employee-management gap: Create channels for frontline staff to effectively communicate operational concerns to decision-makers. And for goodness sake, get this into the customer-centric data stream. I guarantee innovative solutions with revenue impact are waiting here.  

"Southwest's challenges are addressable. With the right leadership and strategy, we believe today's challenges are readily addressable." - Elliott Investment Management

About the Author

From due diligence, to 100 day plans, to exit readiness, customer data contains secrets not often seen in traditional PE analysis. Are you ready to modernize your portco’s or company's approach to customer value? See my background or view my algorithmic AI-based consulting services. And for the 10% of you who really want to dig in, read more about how to thrive in "The Age of Customer Equity."