A Shadow Looms Over Southwest! Will the Airline Survive the Economic Mines of Moria?

A Disturbance in the Air

Hoom! Gandalf the Grey here to cast a light upon the recent troubles brewing in the skies or rather at Southwest Airlines. News has reached even my ears carried on the wings of eagles – or perhaps more accurately disgruntled passengers – that Southwest is scaling back its operations. They speak of reducing capacity in the latter half of this year. A worrying sign indeed like a shadow creeping across the plains of Rohan.

Unit Revenue Flatlines? A Balrog in Disguise!

It seems their unit revenue is expected to be as flat as the Shire after a dragon's visit or even *down* by as much as 4%. Four percent! That may not seem like much to some but to an airline it is a chasm as deep as Helm's Deep. And to add to the woes they are not reaffirming their financial guidance for the years to come. 'Amid the current macroeconomic uncertainty,' they say 'it is difficult to forecast.' Aye difficult it is like predicting the next riddle Gollum will spew forth.

United and Delta Fleeing the Field!

And Southwest is not alone in this plight. It appears that United Airlines and Delta Air Lines those other great eagles of the sky are also pulling back their domestic talons. Delta has even retracted its full year forecast while United calls the U.S. economy 'impossible' to predict. 'Impossible!' I have faced down Balrogs and argued with Ents; I know a thing or two about the 'impossible.' But perhaps even I would struggle to make sense of airline economics these days.

First Quarter: A Glimmer of Hope or Fool's Gold?

Now it is not all doom and gloom. Their first quarter earnings and revenue did in fact surpass expectations. A slight victory perhaps like finding a single acorn in the barren fields of Mordor. They posted a loss per share of 13 cents which while still a loss is better than the expected 18 cents. Their revenue also edged past expectations reaching $6.43 billion. A small comfort but comfort nonetheless.

A Business Model Overhaul: The White Wizard's New Tricks

But here's where things get interesting my friends. Southwest in a move reminiscent of a hobbit suddenly deciding to take up arms is making some rather dramatic changes. After over half a century they are altering their business model. They are selling fares on Expedia plotting to abolish their open seating policy and introducing restrictive basic economy tickets. Next month they plan to start charging for checked luggage! No more free bags I say! It seems even the most steadfast of companies can be swayed by the winds of change... or perhaps the winds of greed?

The Hedge Fund's Shadow: The Eye of Sauron on Luggage Fees

Behind these changes lurks the influence of Elliott Investment Management a hedge fund that has taken a stake in the airline and won board seats. They are pushing Southwest to raise revenue to better compete with those airlines that offer premium seats lounges and international networks. A noble goal perhaps but one that may come at the expense of the common traveler. Is this progress or merely the machinations of a different kind of darkness? Only time will tell. But one thing is certain: the skies above Middle earth er America are changing.