Barron's Streetwise Podcast Summary

Episode Title: Southwest Airlines Turnaround Comes With Baggage

Airdate: April 4, 2025
Host: Jack Hough
Guests: Connor Cunningham (Melius Research), Alexis Moore (producer/guest co-host)

Overview

This episode dives deep into the ongoing changes at Southwest Airlines as the company navigates a “turnaround amid an identity crisis.” Host Jack Hough discusses with airline industry analyst Connor Cunningham and producer Alexis Moore why Southwest—once a symbol of quirky, customer-friendly value—is now making dramatic business changes. The conversation explores what’s driving these changes, how they compare to the broader airline industry, and what it all means for investors and loyal passengers.

Key Discussion Points & Insights

1. Southwest’s Identity Crisis and Changed Strategy

• Southwest’s Historic Role: Traditionally, Southwest thrived during industry downturns by using its strong balance sheet to expand while competitors retreated ([00:24], Connor Cunningham).
• COVID Era Difference: The pandemic was unprecedented; the U.S. government bailout removed the usual advantage Southwest had in tough times ([15:36], Cunningham).
  • “This downturn was different in the sense that everyone got bailed out, so the balance sheet didn’t matter as much.” - Connor Cunningham ([15:36])
• Operational Headwinds: Pilot retirements, air traffic controller shortages, Boeing delivery delays, and over-hiring led to “a much more difficult environment that worked against... a very productive company” ([15:36], Cunningham).

2. Policy Shifts and Fee Introductions

• Baggage Fees: Southwest, famous for its “bags fly free” policy, is introducing baggage fees for the first time starting May 28, 2025—a major break from tradition ([08:03], Hough).
  • “Spirit Airlines was the first airline to bring baggage fees to the U.S.... But Southwest was a holdout for this long, and now they’re bringing baggage fees.” - Jack Hough ([08:03])
• Assigned Seating & Premium Tiers: The company is phasing out open seating in favor of assigned seats and adding premium fare classes ([09:22], Hough).
• Layoffs & Board Changes: First major layoffs in Southwest history announced in February 2025; significant board changes in response to investor (Elliott Management) pressure ([09:42], Hough).

3. Investor and Market Dynamics

• Stock Performance: Despite upheaval, Southwest’s stock has outperformed peers since January 2025, rising 4% while major airlines dropped over 30% ([10:49], Hough).
• Activist Pressure: Elliott Management’s stake and demands for Southwest to align with peer practices (fees, premium services) have driven major changes ([09:42], Hough).

4. The New Airline Industry Model

• Premium Class Focus: Industry-wide, profits are shifting from coach to premium classes; airlines are selling more “comfort upgrades” and shrinking the main cabin ([20:35], Cunningham).
  • “Once you go up, it’s really hard to go back.” - Connor Cunningham, referencing Delta’s customer experience analogy ([20:35])
  • “The main cabin portion [of Delta aircraft] has not grown at all... All of their growth is through the premium seats.” - Cunningham ([22:28])
• Revenue Structure: Ancillary fees (bags, seat selection, etc.) have become necessary to maintain margins as traditional structures no longer suffice ([17:13], Cunningham).
• Loyalty and Credit Card Programs: Legacy carriers are boosting profits and customer retention through loyalty incentives unavailable at Southwest under its old model ([17:13], Cunningham).

5. Southwest’s Turnaround: Risks and Next Steps

• Turnaround Rationale: To catch up to the industry and placate investors, Southwest is adding fees, trimming costs, and shifting routes to focus on core markets ([23:09], Cunningham).
• Competitive Dilemma: Southwest doesn’t need to fully match “ultra low-cost” carriers like Spirit but must modernize to avoid being left behind ([27:25], Cunningham).
• Structural Challenges: Overhiring, misaligned routes, and chasing post-COVID “leisure demand” led to inefficiency and margin pressures ([24:56], Cunningham).
  • “They over hired and... the capacity... did not reflect any of the incremental headcount. So they were basically just way overstaffed and weren’t producing the amount of supply that they should have.”—Connor Cunningham ([24:56])

6. Market Outlook for Airlines

• Short-Term Industry Headwinds: Supply/demand imbalance, negative earnings revisions, and macro uncertainty (including tariffs) cloud the outlook for U.S. airlines ([29:15], Cunningham).
• Best-in-Breed Operators: Delta and United are highlighted as industry standouts due to strong international networks and premium services ([29:15], Cunningham).
• “If you think about Delta, even on a pretty meaningful earnings reduction, their free cash flow production is still very, very high.” - Cunningham ([29:15])

Notable Quotes & Memorable Moments

• On Airline Fees & Customer Experience:

  • “I think, like, it had such a sheen when I was growing up... the fun airline. You could wear shorts to work. Now it’s just like everybody else.” - Alexis Moore ([08:40])

• On Loyalty Shifting:

  • “Are you still going to give them a try or are you, are you done and who are you leaving them for?”
  • “I might be done... I’m leaving them for American.” - Jack Hough & Alexis Moore ([32:05])

• On Industry Transformation:

  • “It’s easy to complain. You can do a 30 minute standup comedy routine just about airline issues...” - Jack Hough ([19:51])
  • “The paid load factor or the actual paid butt in seat has improved significantly... They’re actually selling the products. They’re not giving it away to their highest loyalty people anymore.” - Connor Cunningham ([22:01])

Timestamps for Key Segments

| Timestamp | Segment | |-----------|---------------------------------------------------------------------------------------------| | 00:24 | Historical context: Southwest’s offensive strategy in downturns | | 07:44 | Alexis expresses concerns as a Southwest loyalist; Jack & Alexis discuss airline culture | | 08:03 | Major change: Southwest introduces baggage fees | | 09:22 | Assigned seating, premium tiers, and modernization | | 09:42 | Investor activism (Elliott Management), board overhaul, response to lagging stock performance| | 14:00 | The reality of competing with ultra-low-cost carriers (Spirit) | | 15:36 | Interview with Connor Cunningham begins | | 17:13 | Limitations of Southwest’s previous strategy; changing traveler preferences | | 20:35 | Premium class and aircraft configuration shifts | | 23:09 | Southwest’s turnaround plan, shifts from traditional practices | | 24:56 | Analyst view: from bearish to neutral, underlying company challenges | | 27:25 | How Southwest’s strategy compares with Spirit and Frontier | | 29:15 | Industry-wide outlook, best-in-breed carriers, and structural challenges moving forward | | 32:05 | Alexis admits she may leave Southwest for American; customer loyalty test |

Closing Insight

The episode paints a picture of an airline at a pivotal crossroads—balancing its legacy brand values with the financial and strategic necessities of today's ultra-competitive airline landscape. With major fee and service structure changes, pressure from activist investors, and mounting industry headwinds, whether Southwest’s turnaround unites customers and investors or leaves loyalists behind remains an open question.