Can Southwest Airlines Survive? | Excess Baggage | 2

0:09It's the dark of night, October 2023, in the Colorado Rockies. Two miles above sea level, on the top of Copper Mountain, a gentle snow begins to fall. It won't be gentle for long. The snowfall is part of an early winter storm, and that storm is marching east toward Denver International Airport. There, Southwest Airlines officials have been nervously awaiting this storm for days. And that's because they've spent months and tens of millions of dollars shoring up those defenses after the company's epic meltdown a year ago. Just before Christmas in 2022, a winter storm slammed into Denver International and quickly spread east.

0:54Southwest was overwhelmed. The airline lacked enough winter gear like de-icing trucks to fight back against the frigid conditions. And when combined with their completely outdated crew scheduling software, the airline went into a tailspin. Southwest canceled nearly 17 ,000 flights and stranded 2 million passengers over nine days before it fully recovered. The meltdown prompted a congressional inquiry, public outcry, and an impending Department of Transportation fine. Southwest vowed to shore up its winter operations and its scheduling software. And as dawn breaks over Denver International, Southwest is about to find out if it's ready.

1:41Last year, Southwest found itself outgunned not just by the storm, but also its competitors. Here in Denver, United had nearly twice as many de-icing trucks per plane as Southwest. This year, though, Southwest has bolstered its brigade, adding 15 more de-icing trucks. As Southwest's planes taxi away from gates, the de-icing crews roll into position. A ground crew leader nicknamed Iceman gives the okay for another crew member to get into the bucket of the truck's cherry picker. Hey, Iceman. Yeah, we got one taxiing over so you can get in the bucket. The plane is blasted with a heated propylene glycol mix.

2:24Southwest has purchased an additional 400 ,000 gallons of that ice-clearing solvent since its meltdown last winter. The airline also invested in hundreds of engine covers that keep snow out of engine interiors, and it's bought a bunch of high-powered outdoor heaters to keep equipment like jet bridges from freezing in cold weather. It's also upgraded its maligned crew scheduling software and hired dozens of new crew schedulers and brought on hundreds of new workers here in Denver and other cold-weather cities. That investment did not come cheap. Neither did last year's meltdown. The cascading cancellations last Christmas cost Southwest$800 million in lost revenue and in customer refunds.

3:11The airline took another$350 million hit early in 2023 as Flyers stayed away from Southwest. And as the first storm of the season hits Denver, Southwest is negotiating a$140 million settlement for its Christmas failings with the Department of Transportation. Add it all up and the meltdown's price tag is more than a billion dollars. That's a huge hit to the bottom line. Talk about expensive lessons. When your operations crash, the price tag's bigger than what the news media reports. How do you calculate the cost of lost trust, congressional scrutiny, or those viral posts online? A billion-dollar meltdown shows how neglecting back-end systems, something like crew scheduling, can snowball into a full-blown crisis.

4:05You know, you can sweat the boring stuff before it breaks, or spend ten times as much trying to rebuild when it does. But even with what could have been terminal delays in fixing what's wrong, there's a payoff in getting it right. Southwest weathers this newest storm with minimal disruption. And weeks later, on Thanksgiving, when snow falls across the Midwest and Northeast, Southwest doesn't cancel a single flight. But while Southwest's winter woes may be behind it, it's about to find out that it still lacks something passengers really want. A seat of their own.

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6:50From Wondery, I'm David Brown, and this is Business Wars.

7:20In our last episode, Southwest's leaders failed to heed warnings from frontline staff who insisted that the airline didn't have the right tools to deal with a big storm. When that big storm came, the frontliners were proven right. Southwest's operational meltdown during the 2022 holiday season stranded two million passengers and strained relations with its biggest unions. Now, Southwest's pilots and flight attendants are demanding better pay and a bigger voice inside the company. And that's just one of the problems on Southwest CEO Bob Jordan's radar as 2023 ends. Southwest's costs are climbing.

8:01Its profits, they're descending. Jordan now faces a pivotal decision. Does Southwest chart a new direction? Or does it stay the course? He has billions and billions of reasons to maintain the airline's current flight path. For five decades, Southwest Airlines has set itself apart with operational reliability, low fares, financial stability, and a certain esprit de corps between management employees and customers. Those factors have made it the most consistently profitable airline in the whole industry. While a lot of other airlines have gone bust, Southwest has made billions in profits by doing things its own way.

8:46But the pressure to change from passengers, employees, and investors, that's building. The question now is, will Southwest make the kinds of changes that generate lift? Or will its changes induce a stall? This is Episode 2, Excess Baggage.

9:12It's December 2023 on Wall Street. Southwest CEO Bob Jordan has joined CNBC on the trading floor of the New York Stock Exchange. The opening bell won't ring for another 15 minutes, but in pre-market trading, Southwest's stock is up. That has not been the norm. Since last year's Christmas meltdown, Southwest shares are down almost 23%. Still, Jordan is beaming brighter than the Christmas lights that decorate the trading floor. He's pleased with the airline's improved winter performance, and with the fact that it has hired more than 20 ,000 new employees since he took over as CEO in 2022. He's also grinning on camera over a deal Southwest just inked to buy more than 100 Boeing 737 MAX jets.

9:58I'm really proud of our team this year. We got a new order with Boeing. We got all of our jets flying. We're staffed. And I'm just really proud of all the accomplishments. And we are taking a lot of momentum into 2024. In fact, when the new year arrives, Boeing will suffer a blowout. And Southwest will hit serious turbulence.

10:28It's January 2024 in Dallas, an office building near Dallas' Love Field. The president of Southwest Airlines Flight Attendance Union, Lynn Montgomery, answers an incoming Microsoft Teams call. The call is from an election technology company that has been counting votes from Southwest's flight attendants nationwide. The question on the ballot is this. Do the flight attendants want to authorize a strike against Southwest? Montgomery has a pretty good idea of what the tally will show. She's been flying with Southwest for three decades. And although she loves her job and loves her passengers, she's fallen out of love with Southwest, which once billed itself as the Love Airline.

11:13Montgomery and thousands of other flight attendants have gone more than five years without a new contract. Those years included the pandemic where flight attendants took a beating, sometimes literally, as they dealt with increasingly unruly passengers. Now, they want higher pay and better working conditions. In December 2023, just as Southwest was hoping it would get through the holidays without another meltdown, the airline offered its flight attendants a new deal with 20 % raises. But when the flight attendants learned that Southwest pilots would get an even sweeter deal, almost 30 % more in pay, the flight attendants rejected the offer.

11:54Now, they're taking their first ever vote on whether to strike. That same move seemed to pay off for Southwest pilots. Last year, the pilots okayed a strike for the first time in Southwest's five-decade history. Soon after, the pilots got the deal they'd been looking for. It included a$400 million contract signing bonus for all Union members. The bonus provides the pilots with retroactive raises for the years they worked without a contract. Montgomery would like to see a similar number for her flight attendants. Her eyes widen as the results of the flight attendant vote pop up on her screen. The vote is overwhelming.

12:3598 % of all flight attendants have said yes to a strike. If they go through with that strike, it'll stop Southwest cold.

12:51It's April 2024 at Dallas' Love Field Airport. A stone-faced Southwest Airlines CEO, Bob Jordan, stands on a roof deck at the airline's headquarters. The deck overlooks the airport's runways and terminal. There, a couple of Southwest Airlines Boeing 737s taxi toward runways, preparing for takeoff. As they do, the airline's stock takes a dive. That's why Jordan looks so grim. After losing money in the fourth quarter, thanks in part to that big bonus it paid its pilots, Southwest just reported more dismal financial numbers. Southwest lost$230 million in the first quarter of 2024. That loss comes even though Southwest had record first-quarter revenues of$6.3 billion.

13:40And the next quarter might be just as bad. That will reflect a big upcoming cost. The$364 million bonus Southwest just yesterday agreed to pay to its flight attendants for signing a new contract that averted a strike. Peace has not come cheap. Southwest's flight attendants got a 22 % raise as part of their new deal. They're now the highest paid in the industry. And Southwest has another big problem. It doesn't have enough planes for all those better-paid pilots and flight attendants. Blame that on Boeing. Three months ago, a door plug on a Boeing 737 MAX 9 operated by Alaska Airlines blew out during a flight.

14:27The plane landed safely, but the incident has done serious damage to Boeing. The Federal Aviation Administration has amped up its safety checks on the jet maker because of the blowout, and that slowed Boeing's production roll. Back in January, Southwest was expecting to accept 85 new Boeing 737 MAXs. By March, Southwest cut that number almost in half, to 46. Now, in April, Southwest trimmed its estimate again, down to just 20 planes. Without those new planes, Southwest needs to get more mileage out of its older jets. And older jets, just like older cars, need more maintenance. That's taking a bite out of Southwest's bottom line, as Jordan explains live on CNBC.

15:17Now, the Boeing delays are very painful. They cause us to replan. They hurt us on the revenue front. They caused us to be inefficient. And we're working all of that. As Jordan speaks, shares keep tumbling. They're down more than 9 % on the day. Past couple of years have been worse, with the stock down more than 40%. Jordan needs to figure out how to get more lift for Southwest's financial wings. He starts by cutting back on the airline's forward thrust. Jordan tells CNBC viewers that the airline is ending a breakneck expansion that it began just before Jordan took over as CEO in early 2022. Jordan had made that expansion a key priority.

16:00He led the airline to hire more than 20 ,000 people and added multiple new destinations. Hey, look, I get it. Most companies dream of scale, but there's a fine line between growth and overreach, right? Southwest expanded like it was still flying in the 2010s, the boom times, not in a post-pandemic world with grounded jets and testy unions. Growth without the right resources is like adding passengers to a plane with no extra fuel. Looks great, till you run out of runway. It was all too much, too fast. And as of today, Southwest is shrinking its flight network. It's also shrinking heads. A Southwest jet roars into landing as Jordan shouts out an explanation on TV.

16:51We have stopped and frozen nearly all hiring. We have voluntary programs underway. And we expect to end 2024, 2 ,000 heads below 2023. And we'll be down again in 2025. And through our voluntary time off programs right now, we're already seeing nearly 1 ,000 employees take those programs. As it racked up consecutive profits over the decades from 1973 to 2020 and even again from 2021 to 2023, Southwest has never had a mass layoff. That was even true during the pandemic. In October 2020 alone, American and United furloughed 32 ,000 people combined. Southwest reduced staff too, but only through voluntary exits.

17:40Even before Bob Jordan arrived at Southwest in 1988, the airline approached layoffs as a measure of last resort. Southwest prided itself as something of a do-gooder in that way. It believed it was doing good for its employees as well as for the American flying public. It even dubbed itself as a, quote, symbol of freedom. And the airline has just rolled out a new ad campaign that Southwest says is all about, quoting here, freedom and flexibility. The ad touts Southwest's no-change-fee policies, and its two-free check-bag allowance for every passenger. One of the spots features a vacationing traveler who draws attention for his wild mane of hair.

18:23The mop-top traveler explains himself to a stranger on the street. I check two bags on Southwest for free. I pack a lot of shampoo. Can't get this with three ounces. This is full bottle, baby. Those free bags? Just one of the offerings Southwest has that most other carriers don't. Still, as Jordan stands viewing those runways at Love Field, Southwest is perched in a precarious position. With pricey new union contracts, it can't afford to match the fares of ultra-low-cost carriers like Spirit. And while it offers free bags, it doesn't have the money-making perks like premium seating that legacy carriers like United have.

19:07And that's left Southwest feeling like it's stuck in a middle seat. And now, Bob Jordan has a choice. He can settle for the middle, or he can pay for an upgrade. Actually, scratch that. His choice is to either stay in the middle, or find out if his customers are willing to pay to fly on an upgraded Southwest Airlines. And as Jordan will soon discover, not all Southwest Flyers are ready to pay for a better ride.

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22:46Let's cool our collective jets for just a moment. It's a good time to check in and see where we are on this journey. So, it's the spring of 2024, and Southwest isn't the only low-cost carrier suffering because of problems with planes. Spirit and JetBlue are also cutting flights, and that's carving into profits because of an issue with a specific aircraft engine. Spirit and JetBlue were already way off course after both posted net losses in 2023. The two airlines tried a merger, though it wasn't cleared for takeoff by regulators who scuttled the$3.8 billion deal in 2024. Meanwhile, all the major U.S.

23:25legacy carriers, American, United, and Delta, they're raking in cash. United made$2.6 billion in 2023. That's more than three times what it made a year earlier. Americans' revenue that same year? Around$53 billion, the most in its 93-year history. And Delta? Well, Delta made a bigger profit than American and United combined. It's now the nation's most profitable airline. The reason for that is something we talked about in our last episode. Remember when we said that after the pandemic, air travelers seemed to want more than just a cheap seat? Well, the legacy airlines have lots of premium seats, at a price, of course.

24:14Extra leg room, front of the plane. Oh, lots of other perks for sale, too, like airport lounges and premium loyalty programs to say nothing of flights all over the globe. Budget carriers like Southwest? Not so much. Unless, well, unless Southwest decides to follow suit. And they're now thinking along those lines. What can we sell? But this way of thinking, it goes against one of their key strengths, the perception of the value proposition. And structurally, Southwest has one key advantage they're not so eager to change. Unlike legacy airlines that fly small and big jets from a range of manufacturers, Southwest uses just one type of plane.

25:01You know, when Southwest sent its first official flight barreling down the runway at Dallas' Love Field back in 1971, the plane it used was a Boeing 737. In 2024, that tradition hasn't changed. It's the largest single-aircraft fleet in the whole world. And that, along with its free-bags policy, these aren't just quirks. This is cost control with a friendly face. Southwest figures one type of plane saves money by simplifying pilot training, maintenance, and ground handling, and by standardizing the boarding process across the fleet. Oh yeah, about that boarding process, that's another one of Southwest's unique quirks.

25:48In April 2024, Southwest still has no assigned seats. Instead, passengers get on and grab whatever seat they can find. And every seat is the same. Other than the exit row, no extra legroom here, and no first class either. That open seat policy incentivized passengers to get their butts into the best seats fast and faster boarding made for less time on the ground and more wiggle room to hit scheduled arrival times. That's important because Southwest's business model relies on its people and planes being perceived as more productive than the competition. Still, Southwest's boarding system has been derisively characterized as a cattle call But Southwest has rounded up a profitability record that's unmatched by any other major carrier thanks to this combination of quirks.

26:41But now, Southwest is fighting financial headwinds. And it's doing so just as winds of change are blowing across the airline industry. Those seating perks that Southwest doesn't have are really taking off with consumers. And while Southwest holds the line on free bags, competitors like JetBlue and Spirit and American and Delta are stuffing their pockets with billions of dollars in bag fees. That's got some insiders at Southwest, as well as some outside investors, asking a critical question here. Has Southwest's uniqueness become its weakness? That question is about to shake Southwest to its core.

27:26And as that shakeup comes, some Southwest passengers will get rattled and rolled.

27:40It's June in Oklahoma. Just after midnight, a Southwest flight crew guides their 737 toward landing at Oklahoma City's Will Rogers International Airport. In the suburb of Yukon, Oklahoma, one resident is drifting off to sleep. He's rattled awake by the sounds of jet engines. The resident jumps out of bed and heads to a nearby window. There, he's shocked to see a low-flying commercial jet. He's looking at Southwest Airlines Flight 4069. It's inbound to Will Rogers from Las Vegas. And it's just 525 feet off the ground, even though the runway is still eight miles away. An alarm sounds in the control tower at Will Rogers.