Southwest crisis reveals clubby world of airline leaders

THE operational chaos that engulfed Southwest Airlines over the busy holiday period was a crisis decades in the making.

In the aftermath of a meltdown that led to 16,700 flight cancellations and may cost the airline more than US$800 million, blame has fallen on an outmoded crew scheduling system and an unusual point-to-point route network. Southwest was overwhelmed and unable to adapt as a severe storm swept the US.

But behind those specific issues is an insular management team that critics say lacks the imagination and technological expertise to help avoid such crises. While the bootstrap culture instilled by co-founder Herb Kelleher turned Southwest into one of the nation’s largest carriers, the size of the company now demands new ways of thinking as well as investment in innovation.

“It makes you wonder if there isn’t sort of a correlation or cause-and-effect here, where you’ve got a fairly entrenched, stagnant board, a grow-your-own leadership team since it was a very small, scrappy airline,” said Keith Meyer, global leader of the CEO and board practice at executive search firm Allegis Partners. “A founder-based culture can only take it so far.”

Southwest is full of lifers. Bob Jordan, who took over as chief executive officer in February, has been with the airline for 34 years. The chief financial officer and communications chief have each worked there 30 years, while the chief commercial and chief legal officers have been around at least 20. The closest to a newbie among Southwest’s top management might be chief operating officer Andrew Watterson, who joined a decade ago from Hawaiian Airlines.

Jordan does not see it as a problem.

“We’ve always been proud of the fact that we’ve developed leaders here, and that we have folks with so much tenure,” he said. “They have very deep airline knowledge, functional knowledge and a very deep relationship that serves you well in normal times, and when you get into an incident like this.”

Southwest is not alone in recruiting from within. American Airlines’ top leadership had been together since the mid-1990s, first at America West Airlines, then at US Airways, before a merger with American. The group first began to fracture when Scott Kirby moved to United Airlines in 2016 and later became chief executive officer there.

“The aviation industry more broadly has been a bit of a laggard in experimenting with executives from outside, let alone their boards,” said Jason Hanold, chief executive officer of executive search firm Hanold Associates.

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But Southwest is in a unique position, with the challenges of a major carrier and the mindset of a small one.

The airline, which began flying between a handful of cities within Texas in 1971, has grown into a behemoth that has carried more domestic passengers than any other airline in recent years. That expansion has added complexity to its keep-it-simple business model, and resulting cost pressures mean that it often cannot offer the cheapest fares.

Southwest’s focus on stretching every dollar has also made it more conservative than other carriers in a highly regulated, safety-focused industry that rewards consistency, said Samuel Engel, senior vice-president for innovation at aviation consultant ICF, and former head of its aviation group. It leans more on insiders because of “the continued belief that Southwest is different”.

The airline’s 13-member board has an average tenure of nearly 12 years, compared with about six and a half at Delta Air Lines and American and five and a half at United, which agreed to a board revamp in 2016 at the behest of activist investors. None of Southwest’s directors have a background in tech.

The carrier has a long-standing reputation of being slow to adopt new technology, and spent years implementing a new reservation system and updating its maintenance operations. It is now spending US$2 billion to improve a balky Wi-Fi system, add power ports at seats and install larger overhead bins. 

“Southwest is the largest domestic airline in the US, and it should start behaving that way,” Helane Becker, an analyst with Cowen, said in a research note. “There are probably a lot of smart technology people who are getting laid off from tech companies that could help it out.”

Southwest has acknowledged that it put updates to its crew scheduling system behind other improvements, despite longstanding complaints from pilots and flight attendants. Watterson called the system its “Achilles’ heel” in the December breakdown.

The airline has said it is looking at every aspect of operations to find what produced the meltdown, and expects to “swiftly” reach conclusions. It has not said how many passengers were affected, but the company is reimbursing travellers for cancelled flights and hotels, as well as for meals and other related expenses.

Its shares have fallen slightly since the travel fiasco, even as the broader market has gained. The stock rose 0.5 per cent as at 7.22am Monday (Jan 9) before the start of regular trading. 

Southwest tumbled 21 per cent in 2022, the second-worst performance among the five biggest US carriers. The reputational damage may lead to more volatility, and its shares will underperform the S&P 500 Index by 5 per cent over the next two months, said Nir Kossovsky, chief executive officer of reputation risk insurer Steel City.

Jordan said he is committed to getting the company back on track, regardless of what it takes.

“We have a 51-year history of doing really well, operating really well,” he said. “This one event, which is significant, won’t define us.” BLOOMBERG