The rise and fall of Southwest Airlines

For 47 consecutive years, Southwest Airlines did something that no other airline in history had ever done. They were profitable for each of those years. But then by 2022, they canceled over 17,000 flights over the holidays, stranding over 2 million passengers. Today, the stock is down over 50%. The CEO has been fired multiple times, and activist investors have come in and pushed to take over the entire company. This video is the rise and fall of Southwest Airlines. Today's video is sponsored by HighLevel. More about them later. Southwest started back in the 1960s when the conditions were perfect for an upstart airline. The Sunbelt was exploding. Texas alone grew by 17% in the 1960s. Cities like Dallas, Houston, and San Antonio were becoming major economics and population centers. But much different than today, flying back then was a regulated industry, meaning a government board set schedules and prices. Under regulation, sometimes the fares were crazy. The tourist class fare from New York to Chicago could be upwards of $4,000 in today's money. And fewer than half of people in the United States had ever been on a plane in their entire life as of 1972. But things were changing that would fix all of that. And in 1968, Boeing had released a revolutionary plane called the 737. Whereas big planes like the 747 and the other jets like that needed big city pairs with big dollars to make them work. The 737 could operate at city pairs where those planes just couldn't make them work. The 737 was cheaper to buy, cheaper to operate, and cheaper to maintain than all of those other big jets.

And the 737 would be the technology breakthrough that would enable the entire business model for Southwest Airlines. Seeing this coming, in 1966, businessman and lawyer Herb Kelleher and another man named Rollin King sketched out the idea for a new airline serving only Texas in a San Antonio bar. The plan was brilliantly simple. They would fly solely inside of Texas, therefore avoiding regulation by the overpresent Civil Aeronautics Board that regulated interstate travel. Houston, Dallas, and San Antonio formed the ends of the Texas Triangle, 200 to 250 miles apart, and, uh, well, major business centers. These were perfect routes for the incoming Boeing 737 economics. But Southwest's first choice was to do something entirely radical.

They standardized their entire fleet solely on 737s. This would help them be more efficient and therefore more cost effective than their rivals.

The first thing that the incumbents did, Braniff, TransTexas, and Continental did, was to sue to prevent upstart Southwest Airlines from operating. They were scared that Southwest Airlines' model without all the overhead theirs had would basically be too competitive and hurt their business. Kelleher, whose stake had only been $20,000, fought the case all the way to the Supreme Court. In December 1970, after burning several years and over $500,000 in legal fees, Southwest Airlines prevailed in court. And so on June 18th, 1971, Southwest Airlines' first flight took off from Dallas' Love Field.

Southwest one-way fees inside of Texas, say from Dallas to San Antonio, were about $20, charges about $126 one way in today's money. And you could compare that to Braniff, which was charging basically 3 times that of Southwest fares.

And so Southwest started to go after business travelers who were driving between the Texas Triangle cities because flying was too expensive. Kelleher saw that their competition wasn't just the existing air travelers and the other airlines, it was people's automobiles. Having lost in court, Braniff turned to the next thing that they had at their disposal, which was they were a big corporation. So they dropped their fares on the Dallas to Houston route to just $13, starting a price war with upstart Southwest. If Braniff couldn't legally get them out of business, they were going to compete until Southwest was out of money.

So what did Southwest do?

Well, they matched the fares and they did something else which was super creative and really good at getting attention. They decided that they would give people an option. They could use the Braniff fare Or if they spent $26, they would throw in a bottle of Crown Royal or Chivas Regal. If you were a business traveler on Southwest, Southwest got a ton of publicity, and for several months they became the biggest distributor of these two brands of liquor in the entire state of Texas.

And you can see this pattern over and over again in Herb Kelleher's style.

He knew how to play good business, but he also knew how to put on a show. And showmanship, whether it's him or Richard Branson, is at Virgin Galactic. These guys know that showmanship can get you a lot of free publicity and therefore a lot of customer awareness. It all worked. That same year, Southwest, despite only having 3 planes operating, showed its first operating profit. Whereas a typical airline took 45 minutes or longer to turn around its plane and get it back up in the sky, Southwest pioneered the 15-minute plane turnaround. Empty the plane, fill it back up, get it back in the sky, making money. Ironically, this wasn't because they had some grand scheme to do so. In 1972, facing a cash crunch, Southwest had been forced to sell its fourth plane. So to keep its schedule, it had no choice but to figure out how to get its planes back in the sky as quickly as possible. This quick turn meant that Southwest's planes and its whole business had an advantage against its competitors. Whereas Braniff, or one of the incumbents, might be able to fly 6 or 7 flights a day per plane, Southwest could fly nearly double that with 11 or 12 per plane. And it got even better for Southwest. Because they standardized on 737s, that meant they only had to worry about maintaining one type of plane. Their pilots meant that every pilot could fly every plane in the fleet. It was just simpler and therefore cheaper to operate. And look, they made some questionable decisions too. In the '70s, the flight attendants wore go-go boots and miniskirts and served love potions. It was a different time back then. And things went well through the '70s. They stayed small and scrappy and profitable. Then in 1978, Southwest got lucky. The Congress passed the Airline Deregulation Act, meaning that all those restrictions and regulations, it was gone. It was time to compete. Suddenly, any airline could fly any route and charge any price. The free market was coming for airline travel. Southwest competitors were the incumbents. They were stuck with big union contracts, hub-and-spoke systems, and complex fleets. Southwest, well, it was none of those things. And now the law would let Southwest be unleashed to put their lean, efficient model in front of customers nationwide. By 1982, they'd expanded their fleet to 37 aircraft, suddenly flying to places like Phoenix, Las Vegas, Kansas City, you name it. They were flying there across the US. They targeted first things that would be most fruitful for their model, and these were city pairs that the big airlines had ignored or overpriced. An investor and lawyer, Herb Kelleher. He became CEO in 1981, bringing his flair for the drama and personality to the job. This was a time when kind of the flamboyant CEO personality was kind of more normal in the United States. And Herb, well, he leaned into the whole thing.

He famously, to settle a dispute with another airline, challenged the guy to an arm wrestling contest. And, well, he won and they got to use the trademark.

Herb spent lots of time on the front line with the employees. And, you know, I think this was something awesome about Southwest at the time.

It built the internal culture in a way that back in the early 2000s and even in the '90s when I flew them, like, there was just something special about the attitude of the people that were working there. They love the customers and they love their airline. And Herb being on the front line all the time definitely created that. And while legacy airlines basically treated employees as a necessary evil, Southwest saw them as partners. And this culture that Herb created by being on the front lines and doing all this kind of stuff, well, it worked. They put together schemes where employee profit sharing meant that everybody succeeded financially when the airline did well.

And this was perfect timing. The baby boomers were becoming parents during this time. America was getting wealthier. The middle class was growing. There was more disposable income to go do trips to Orlando or faraway places. And Southwest, well, it was perfectly positioned for that change in the, in the economy and in the United States. Suddenly, regular families were piling on Southwest Airlines planes to go spend spring break wherever they were going. And it wasn't just for elite business travelers anymore. People joked at the time, and this was true, Southwest positioned it basically as the Greyhound bus for the sky, priced at a reasonable level of value for everyday people to travel in the air. In 1997, 25 years after founding, the airline showed a $2.8 billion profit that year. And celebrated its 25th year of profitability. They kept pushing the model out throughout the '90s. They had expanded to California, the Midwest, the East Coast, and eventually started to push into the mom-and-pop mall, New York City. It seems Southwest couldn't lose, but right as it reached its peak here, that's where you'll start to see things started to chip away at the fundamental foundation of Southwest and laid the groundwork for the problems you see today. Starting in the early 2000s, the major incumbent airlines started to consolidate. America and America West merged. Delta Northwest merged together. United and Continental became one airline, basically starting to create pretty formidable competitors with fortress hubs able to compete better against Southwest Airlines. Legacy airlines went through bankruptcies, and one of the things that happened in those bankruptcies is those fat union contracts that they had had before, they got reset, eroding Southwest's long-term cost advantage. Then 9/11 came, which was perhaps one of the worst times for air travel in the United States. And desperate for revenue, the legacy carriers started to do a thing called unbundling of their product. Leading the charge in 2008 was American Airlines, who first brought the first checked bag fee of $15 to their customers in economy. Within months, every other incumbent airline and a lot of the other ones had added checked baggage fees except for Southwest. While Southwest stood its ground, by 2010, the airline industry collected $3.4 billion and basically pure profit revenue from baggage fees alone. So while United, Delta, and American attacked Southwest from above, another type of airline emerged in the United States, which was the rise of the ultra-low-cost carriers like Frontier and Spirit. And they would come after Southwest from the bottom. And those guys took Southwest's low-cost model to the extreme. They unbundled everything and charged you for it. You want to pick a seat? You're paying for it. Check a bag? Paying for it. Snack, drink, paying for it. Spirit's average ticket was $50, but they would typically make per passenger another $55 in fees. And pushing into the 2010s, Southwest found itself in a messy middle. They weren't making as much revenue per seat as legacy carriers were, say, making $200 plus. Southwest would make $150. And at the bottom end, folks like Spirit and Frontier would make $100 per seat. Faced with the industry changing around them, Southwest decided to do, well, nothing. They did make some good moves. They were famous for paying for fuel hedges, which would allow them to lock in fuel prices while other people were paying more for fuel. But eventually those would run out as well. They also decided to get bigger and keep building their kind of consistent value proposition to everybody else.

In 2011, they spent $1.4 billion to acquire another airline called AirTran, and this gave them important access to the Atlanta market. If you remember Southwest's marketing from this time and positioning, they really leaned into the "bags fly free" thing. They just tried to point out that the other airline carriers were greedy and they weren't.

They ran Super Bowl ads mocking their competitors' fees and à la carte models. They kept their open seating policy.

Mythbusters actually studied it and proved that it was on average 10 minutes faster than the choose-your-seat models.

In the 2010s, Southwest became America's most trafficked domestic airline. Caring more people, more seat miles than anybody else. And from an astounding years of 1973 to 2019, they were profitable for 47 consecutive years. Just incredible. By 2019, they operated over 750 Boeing 737s, the largest fleet of them in the world. And astoundingly, Southwest had never had a layoff in over 50 years of operation. But underlying all of this, success had bred complacency.

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See, back in 2004, Gary Kelly became CEO, and Gary Kelly was a finance guy, which is very different than a passion, strategy, and frontlines guy like Herb Kelleher was.

And well, he started to look at the world differently than Herb did.

Under Kelly, the shift had gone from operations and customer delight to good-looking financials. So while Southwest is doing things like expanding in Hawaii and doing their first kind of transocean flights, all of the other carriers around them were continuing to evolve. As an example of that, like all the legacy carriers were starting to do super economy fares, unbundling their bundled service.

And Southwest, well, Southwest just kept being Southwest.

Delta invested billions to upgrade their technology and their product. Their seats and their planes were just better. They became the gold standard. United and American kept modernizing their fleets, becoming even more formidable. As an example, Southwest kept running the backend of their airline the same way they did back in the 1970s. And it's not like nobody told them. The pilots union complained about this vociferously throughout the 2010s. That system required manual input, phone calls, and stuff printed out on paper. So while Southwest did get more efficient, say during the years from 2017 to 2021, while they reduced overall headcount, they actually de-invested in IT and infrastructure. In other words, going the opposite direction where all the other carriers were investing in making their backends much more efficient, resilient, and effective. They were cutting IT investment right as they needed it the most. The next thing to happen was the 737 MAX tragedy that happened in 2019. After two crashes worldwide, the 737 MAX was grounded indefinitely in United States, leading Southwest to have to cancel numerous flights almost immediately. They grounded 34 planes. In October '21, the cancellation of flights due to the 737 MAX stuff cost the airline $75 million in lost revenue and over 2,000 flights grounded.

Management promised to fix the IT systems and upgrade everything, but heck, they were still distributing weather ports on paper to the pilots. Southwest, once an airline that had built up so much trust with customers over nearly 50 years, went from a 0.8% cancellation rate in 2012 to a 2.8% cancellation rate just a decade later. In summer 2022, the first time I ever heard this happening, the pilots picketed not for more pay. They went on strike because they wanted better IT and systems backing them up.

Then it all came home to roost. And in December 2022, uh, big snowstorms hit two of Southwest's biggest hubs in Denver and Chicago, respectively. Southwest had made decisions not to have hub-and-spoke situations like the big kind of legacy carriers did. Instead, they did a bunch of point-to-point routes with pilots spread all across the country, often far from home. This meant that the airline had no backup plan when these two storms hit. Southwest's crew scheduling software hadn't been updated since the 1990s. And that meant the airline had no clue where the crews and pilots and flight attendants were. The system was so antiquated that it required manual fixes and phone calls to get it back on track.

Whereas Delta, well, they just click some buttons on a computer and it was all automated.

And the airline having outgrown all of its systems meant these two storms basically pushed the airline into a total failure mode and people were scrambling in the background just trying to figure out what was going on.

Southwest went on to cancel 5,500 flights over the next 2 days. You compare that to Delta, well, they only canceled 311.

Other airlines were down for a couple of hours.

Southwest kept on canceling flights for 10 more days. In total, they canceled nearly 17,000 flights and stranded over 2 million passengers over the holidays. There were news reports where mountains of luggage piled up at airports with no way to reunite them with their passengers. The Department of Transportation was so pissed by this that they fined Southwest Airlines $140 million, the most of any airline. That number was 30 times larger than any penalty in history applied to any airline in the United States. The meltdown cost Southwest nearly $1.2 billion in lost revenue and checks and compensation that they wrote out to passengers. CEO Bob Jordan at the time went out publicly and said, quote unquote, "We messed up." Yeah, you definitely did, Bob.

And at this moment, you look at where Southwest was, all of the things that had made them kind of unique and special, well, they had mismanaged those things and they had come back to bite them. The standardization on 737s, the ability to like focus on the customer, the culture that Herb Kelleher had built, the point-to-point stuff, well, It all worked for so long until it stopped working. Legacy carriers, tired of kind of Southwest being an upstart for so long, actually marketed their reliability compared to Southwest in their marketing materials. The vultures were feeding on the carcass of Southwest and expected to gain share from them. And Southwest, this airline that had now disrupted an industry over 50 years, well, by standing still, it was now the disrupted. In June 2024, an activist investor stepped in called Elliott Investment Management, and they released that they had bought $1.9 billion worth of stock of Southwest Airlines. Elliott's a $70 billion fund, and they said that they owned 11% of Southwest. And as an activist and turnaround investor, they wanted to see some changes. These types of activist investors run a pretty standard playbook. They come in, they buy up shares, they try to get representation on the board, and then they make changes in the company, ideally, that'll benefit the shareholders and make them more money.

Elliott released a pretty scalding, you know, appraisal of the business and a strategy document. And they said that Southwest stock had gone down by over 50%, while during that same period of time over the past few years, Southwest competitors had thrived.

And they were right. Between 2018 and 2024, Southwest annual profit had gone from $2.5 billion down to $480 million. A huge decrease. By 2023-2024, Southwest's profitability and operating margin was lower than all of the legacy carriers. A stunning reversal. And look, the only reason Southwest still managed to be profitable at all despite all these missteps was because of the dynamics of the airline industry. We basically have 4 companies in the United States that control the majority of air travel. And the reason they control it is because of the way airports are set up. Airports, whether you like it or not, are big moneymakers for local cities and municipalities. And the way they manage their airports is by renting out gate spaces to airlines like Southwest, United, and American. And so if you go to an airport like in Boston or JFK in New York, the limitation is actually the gates.

And that's the big value of a lot of these airlines.

And Southwest, well, it had a lot of gates, which meant it controlled routes, which meant it could price things more profitably. And you, me, the consumer, well, we would pay more for that kind of stuff. And what Elliott de facto was saying here was, "Great job on having these monopolies on airports, Southwest. You're just not making enough money out of those monopolies as you could be." And well, frankly, they were right. Elliott's presentation demanded the CEO and leadership of Southwest be fired and the board reshuffled to give them control. They wanted Southwest to run the other playbook that the legacy carriers were doing. Charge fees, make people pay for seats, do assigned seating. Basically, go get some more money from the consumers.

Elliott and these guys saw huge potential profits from Southwest abandoning all the things that had made it so beloved in the '70s, '80s, '90s, and 2000s.

Look, I'll give it to Southwest.

Early on, management adopted a thing called a porgin' poison pill, which was designed to keep somebody else like Elliott from taking control of the company with a small amount of the shares.

But pressure mounted, and eventually Elliott won. The board, basically a number of members stepped down. Gary Kelly, who was chairman at the time, stepped down in October 2024.

Elliott firmly had control of the company. CEO Bob Jordan, he kept his job, but he was under significant pressure to make Elliott's changes.

The first thing to fall was open seating. In July 2024, Southwest announced it would soon be abandoning open seating. Research they put out as Elliott showed that consumers, especially younger ones, 80% of them preferred assigned seats over the open cattle call. Whereas once Southwest seats were all the same, every seat was a first-class seat, they would now add premium cabins and charge you and me more for those. And remember Herb Kelleher's creation of a magical culture that translated into great customer service? In February 2025, Southwest announced the first layoff in history. 1,750 people were laid off that day. They cut 15% of corporate positions with the idea of saving $300 million annually. These weren't voluntary buyouts. These were people getting on a 7-minute Zoom call and saying, thanks for your service. Been a nice few decades. See you later. The changes kept coming. On May 28th, 2005, Southwest announced they would start charging people for bags. Analysts estimate this will generate between $500 million and $1 billion in additional revenue for Southwest annually. To compete with the ultra-low-cost carriers like Frontier and Spirit, they will be creating a very basic economy product. Well, well, I guess you get to sit next to the bathroom on that one. CEO Bob Jordan, who once said free bags were sacred, now quote unquote said that the changes that they were making were exactly what employees want. Yeah, I'm sure that's what they wanted, Bob. But look, if you go read the forums and online comments of Southwest employees, the sentiment is a little bit different. Those people are heartbroken. Southwest is becoming the very thing that Herb Kelleher had railed against. An incumbent airline with complex fare structures designed to maximize revenue and profits at the expense of us consumers. Between 2023 and 2024, Southwest Airlines revenue has actually grown from $26.1 billion to $26.4 billion, but they actually only made $465 million in profit in 2024. Compare that to their profitability peak in 2018 when they made over $4 billion in that one year alone.

And while the airline industry made over $5 billion in profit from baggage fees alone in 2024, while Southwest had resisted that for decades and been an old-school airline stuck to their ways, and now Elliott and the shareholders, well, they want to change that and they want to get their cut. Ironically, Southwest is actually in a pretty good financial position. They have $9.7 billion in equity and only $6.7 billion in debt.

And while Southwest is becoming Well, what it once despised, Elliott expects that in 2027, all these changes will add $1.5 billion in profit alone for that year.

Looking back, Southwest's model had worked for decades, but they had stubbornly stuck to it. And well, that had attracted Elliott and other shareholders to come in and force some changes.

The saddest part of the Southwest story to me is not the bag fees. It's not the shareholders wanting to get paid. It's not the assigned seating or any of that stuff. The saddest part is that Herb Kelleher, through all those years, created an amazing culture and one that basically created a win-win with all the employees and the shareholders. And because Southwest stood still during the 2010s and 2000s, they opened themselves up for a group of activist investors to come in and basically blow up that culture and turn it into the type of place where people get fired after a couple decades on a 7-minute phone call. And man, that makes me sad. If you enjoyed this video, here's one that you can go see that I did on Spirit Airlines and their travails during the same period of time. And tell me what you think about this video. Did you like it? Check it out in the comments below, write it down there. I try to read them all. Catch you next time.