Southwest Airlines: When a Low-Cost Legend Changed the Rules

A Different Kind of Airline

On June 18, 1971, Southwest Airlines began flying three Boeing 737 jets between Dallas, Houston, and San Antonio. Over the next five decades it became one of the largest airlines in the United States by doing things its own way. Instead of routing passengers through a few giant hubs, it flew mostly point-to-point trips between cities. It flew only one type of plane, the Boeing 737. It had no premium cabin and no assigned seats—passengers took any open seat when they boarded—and it charged no fees for checked bags or for changing a reservation. Southwest’s annual report points to its low-cost strategy and its well-known hospitality as reasons travelers choose it. The formula worked: Southwest earned a profit for 47 years in a row, until the COVID-19 pandemic hit in 2020.

A Tough Industry

Southwest’s annual report describes airline competition as intense and unpredictable and says price is a major factor in which airline customers choose. Most domestic flying is handled by Southwest and three other giants: American, Delta, and United. Travelers can compare fares on search sites such as Google Flights and Kayak, which list Southwest’s flights. In 2025, Southwest began selling tickets through Expedia and Priceline, and the share of its passenger revenue booked directly on its own website and app slipped from 81% to 78%. Flying isn’t the only choice, either: the annual report lists driving and videoconferencing as competition.

Launching an airline takes huge sums for aircraft, fuel, technology, and employees, so new U.S. carriers are rare. When two start-ups, Avelo and Breeze, prepared to launch in 2021, the Associated Press noted that the last new U.S. airline before them, Virgin America, had begun flying in 2007.

Airlines also depend on a few powerful suppliers. Boeing is the only company that builds Southwest’s planes, and Boeing’s delivery delays were part of the reason Southwest changed its delivery schedule in 2025. As of early 2026, one model Southwest had ordered, the 737-7, still had not been certified by the Federal Aviation Administration. About 84% of Southwest’s employees are represented by labor unions, and salaries, wages, and benefits made up about 47% of its operating expenses in 2025. Fuel was the second-largest cost (Exhibit 1).

The Holiday Meltdown

Southwest’s worst stumble came during the 2022 Christmas travel season. As winter storms hit, almost 17,000 of its flights were canceled or significantly delayed, stranding more than 2 million passengers. Southwest blamed the weather, which scrambled schedules and left crews and planes out of position. Critics, including the investor described below, blamed outdated software and processes. The airline paid $600 million in refunds and reimbursements to passengers and reported a $220 million loss for that quarter. In December 2023, the U.S. Department of Transportation ordered Southwest to pay a $140 million civil penalty—30 times larger than any earlier department penalty for consumer protection violations.

Pressure to Change

By 2024, Southwest was struggling. It lost $231 million in the first quarter of that year, and the Associated Press reported that rivals were winning over upscale travelers while Southwest had no premium cabin to offer them. Its stock had fallen more than 50% in three years. In June 2024, Elliott Investment Management, an activist investment firm, revealed a $1.9 billion stake in the company. Elliott argued that Southwest had failed to evolve and called for replacing CEO Bob Jordan and executive chairman Gary Kelly, a former CEO.

Southwest began changing course. In July 2024, it announced it would end open seating. Its research found that 80% of its customers and 86% of potential customers preferred an assigned seat, and that customers who switched to other airlines named open seating as the top reason. At an investor day that September, Southwest unveiled a plan called “Southwest. Even Better.” that targeted about $4 billion in additional earnings before interest and taxes by 2027. At the time, it planned to keep bags free: it estimated that bag fees could bring in at most $1 billion to $1.5 billion a year but would cost it about $1.8 billion a year in lost business. In October 2024, Southwest reached a cooperation agreement with Elliott: six new independent directors joined the board, Kelly retired early, and Jordan remained CEO.

The changes came quickly. In February 2025, Southwest eliminated about 1,750 corporate jobs. It added red-eye flights. Then it reversed itself on bags: for most fares booked on or after May 28, 2025, checked bags were no longer free. A new basic fare replaced its cheapest “Wanna Get Away” fare, a vacation-package business called Getaways by Southwest launched, and the airline formed partnerships with international airlines. On January 27, 2026, assigned seating and extra-legroom seats began. To make room for the extra legroom, Southwest is also removing six seats from each of its Boeing 737-700s, which raises its cost for each seat it flies.

Where Things Stand

Then came a shock no airline controls. In 2026, after the United States and Israel launched strikes on Iran, jet fuel prices soared; Reuters reported that they more than doubled after the war began. In the second quarter of 2026, Southwest’s fuel expense was $889 million higher than a year earlier. Its new products helped—average fares rose nearly 21%, revenue reached a quarterly record of $8.4 billion, and net income was $233 million—but in July 2026 Southwest lowered its profit forecast for the year and trimmed its planned growth in flying for 2026 to about 1.5%, down from 2%. Rival Spirit Airlines, an ultra-low-cost carrier going through its second bankruptcy restructuring since November 2024, stopped flying on May 2, 2026, after what its attorney described as a surge in jet fuel costs; Southwest was among the airlines that offered $200 one-way fares to stranded Spirit customers. Southwest still has bragging rights: J.D. Power ranked it No. 1 in customer satisfaction among economy passengers in 2026, and its Rapid Rewards loyalty program grew to nearly 100 million members. As of October 2026, the open question is whether Southwest’s new extras can earn enough to cover higher costs without losing the customers who loved the old Southwest.