Southwest Crisis Reveals Clubby World of Airline Leaders

(Bloomberg) — The operational chaos that engulfed Southwest Airlines Co during the busy holiday season was a decades-long crisis.

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After the crash, which caused the cancellation of 16,700 flights and could have cost the airline more than $800 million, the blame has been placed on an outdated crew scheduling system and an unusual point-to-point route network. As a violent storm swept across the United States, the Southwest was overwhelmed and unable to adapt.

But behind these specific issues, critics say, there is a lack of imagination and technological expertise to prevent such crises. While the bootstrap culture instilled by co-founder Herb Kelleher has made Southwest one of the nation’s largest carriers, the size of the company now requires new thinking and investment in innovation.

“It makes you wonder if there isn’t some sort of correlation or causation here, where you have a fairly entrenched, stagnant board, a very small, scrappy airline, and you have your own thriving leadership team. ” Said Keith Meyer, CEO and global leader of the board at executive search firm Allegis Partners. “A founder-driven culture can only go so far.”

The Southwest is full of lifers. Bob Jordan, who took over as CEO in February, has been with the airline for 34 years. The chief financial officer and chief communications officer have each worked there for 30 years, while the chief commercial and chief legal officers have worked there for at least 20 years. Among Southwest’s top management, the closest thing to a rookie might be Chief Operating Officer Andrew Watterson, who has been on the job for a decade. previously from Hawaiian Airlines.

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Jordan does not see this as a problem.

“We’ve always prided ourselves on developing leaders here and having people in so many positions,” he said. “They have very deep airline knowledge, functional knowledge and very deep relationships that serve you well in normal times and when you have an event like this.”

Aviation ‘Laggard’

Southwest is not alone in hiring from within. American Airlines Group Inc.’s top management has been together since the mid-1990s, first at America West Airlines and then at US Airways before merging with American Airways. The group initially began to fall apart after Scott Kirby moved to United Airlines Holdings Inc. in 2016, where he later became CEO.

“The airline industry more broadly has been a bit of a laggard in experimenting with outside executives,” said Jason Hanold, CEO of executive search firm Hanold Associates.

But Southwest is in a unique position with the challenges of a large carrier and a small mentality.

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

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

The airline’s 13-member board has an average tenure of about 12 years, while Delta Air Lines Inc. and about six and a half years on American and five and a half years on United. activist investors. None of Southwest’s directors have a background in technology.

The carrier has long been a slow adopter of new technology and has spent years implementing a new reservation system and revamping its maintenance operations. It is now spending $2 billion to upgrade its weak Wi-Fi system, add power ports to the seats and install bigger overhead boxes.

“Southwest is the largest U.S. domestic airline and it needs to start acting like it,” Cowen Inc. analyst Helane Becker said in a research note. “There are probably a lot of smart tech people who have been laid off from tech companies who can help with that.”

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Achilles heel

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

The airline said it was looking into all aspects of operations to find out what caused the crash and expected to come to conclusions “soon”. It’s not clear how many passengers are affected, but the company is paying travelers for canceled flights and hotels, meals and other related expenses.

After the travel fiasco, its shares fell slightly, although the broader market gained. The stock rose 0.5% before the start of regular trading at 7:22 a.m. Monday.

Southwest is down 21% in 2022, the second worst performance among the five largest US carriers. Reputational damage could lead to more volatility, according to Nir Kossovsky, CEO of reputational risk insurer Steel City Re, whose shares will underperform the S&P 500 by 5% over the next two months.

Jordan said he is determined to get the company back on track, no matter what it takes.

“We have a 51-year history of doing really well, doing really well,” he said. “This one event that matters will not define us.”

(Updates with opening shares in paragraph 18.)

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