Southwest does did not lay people off.
In the nearly 54 years since the airline started flying, it never has laid anyone off, and that was a key part of the company lore. But late yesterday, on a holiday when they hoped nobody was looking, the airline announced that it is slashing 15 percent of its corporate workers, or 1,750 people. This is a terrible, terrible sign for the future of the airline. No matter how the airline tries to spin this, this is not how Southwest does business on its own. Clearly, Elliott Investment Management has far more power than it should.
This is a very sad day.
Southwest is an airline that is currently making big changes. I’ve written about the move toward assigned seating and extra legroom seats as the airline tries to find some kind of balance in its plans to revamp itself and play catch-up after years of neglect under former CEO Gary Kelly. It has added redeyes, and it has just gone into selling through metasearch sites like Google Flights and Kayak. I find these moves to be positive, because they don’t erode what makes Southwest different than the rest. It’s good change.
But as a general rule, when you’re making big changes to your service — and it’s not a time of financial desperation — you don’t want to go laying people off. Cutting back on staff during a business transition is the best way to crush morale just when it’s the most vulnerable. It’s understandable when you’re in dire straits and you need to reduce costs quickly, but when you’ve never done it in the half century you’ve been in business and you aren’t bleeding money? It’s a terribly short-sighted plan.
After all, Southwest’s people are a big differentiator. I know that every airline says that it has the best people, but Southwest… well, it kind of really does. Not every single person will have that warrior spirit all the time, but the percentage of times I’ve found helpful and good Southwest employees is far higher than on other airlines. The 1,750 jobs that are going away are not front-line people, to be clear, but the cuts still have a chilling impact on the entire workforce at the company.
Anyone who has been laid off or been at a company when others are laid off knows just how disruptive and painful it is. Those who need to be focused on their own work are now distracted either because they lost a friend in the layoff or they now have to take on additional work to pick up the slack. And the entire layoff process? It is brutal even for those who remain.
I reviewed a memo outlining that the headquarters building was locked down last night so nobody could enter. Then this morning only those essential to the operation were allowed to come to work. Everyone else had to log on at home where they would receive a link for a virtual meeting. That’s where they would find out if they kept their job or not. It’s all so corporate and terrible, and NOT Southwest-like. I get why they’re doing it this way if you have to do a layoff, but they could have avoided that if they had just… not laid people off.
Even more concerning for a place like Southwest, this creates a culture of fear. A layoff has a long-term impact that is very hard to reverse, and the impact is even bigger during a time of transition. That’s where Southwest finds itself today, and its workforce is feeling the shock right now.
The question that still remains is… why? Why would Southwest feel the need to lay people off when it’s so against the airline’s culture and needs? Yes, it is overstaffed, and that is not a secret. But that’s why you use tools like early retirements and packages. That helps to cull the herd over time without needing to use the scalpel to make cuts. The key part of that phrase, however is “over time.” Apparently it can’t wait, and that is ridiculous.
It’s not like Southwest is in financial danger. It made a $465 million profit last year. Cash levels are steady. Overall, it held about $7.5 billion in cash and cash equivalents at year-end, and it had only about $5 billion outstanding long-term debt.
This is one of the healthiest balance sheets around, even though the income statement is weak. In other words, it has a big war chest, but it’s not making the money it should be making from its operations. That’s why the airline put together the big transformation plan I talked about earlier, and that has real potential. So why do the layoff now? Why be so short-sighted? It has to be pressure from the investors.
Elliott Investment Management saw that big balance sheet and a defensible market position and realized there was gold in them thar hills. It started accumulating a financial stake in the airline, and it began rattling cages. Just when things reached a fever pitch, Southwest and Elliott came to an agreement to back off their fight.
Bob Jordan would stay as CEO, but Elliott would be able to nominate five directors on the board. In addition, Gary Kelly — who I largely blame for letting Southwest stagnate for so many years and get into this position — and other long-time board members would be kicked off. With all the new board members that had already been added, this became a very young board and one where Elliott could presumably have real influence. The detente was set to last until just about a year from now, giving Southwest some runway to prove itself.
It seems to me that Southwest had the wool pulled over its eyes here. CEO Bob Jordan has been with Southwest for ages (excluding a stint away), and he knows the importance of culture. This is not a man who is going to just throw around the idea of layoffs casually. Clearly Elliott and its board members — plus presumably other investors — decided that this needed to happen, and they ratcheted up the pressure.
After all, Southwest’s stock hasn’t done all that much since this saga began. And Elliott is not patient.
This to me smells like Elliott exerting its influence to do the wrong thing from the perspective of long-term success at the airline. On the other hand, it is a great way to slash costs and juice the stock price in the short term. That’s all Elliott cares about. It wants to make money quickly, so it can then cash out and use that money to make more money somewhere else.
That isn’t a surprise in itself. Of course Elliott wants to make more money quickly. What is surprising is just how much influence it would appear that Elliott has to make something as detestable as a layoff actually come to fruition.
I don’t like the precedent this sets, and I worry about what other short-term money grabs may be coming in the future as Elliott tries to squeeze everything it can out of the airline.
In the end, Elliott will make its money, but it will have squeezed the life out of this airline. I find this sickening, but then again, it’s the system we live in. And now the people of Southwest are all paying the price, even those who remain with the airline.
