Southwest Airlines this week made the headlines for announcing the first-ever company-wide corporate layoffs in the airline’s 54-year history, something which has undercut the airline’s historical operating model of putting employees first. This decision primarily aims to streamline operational costs and help improve profitability, and the decision came as the result of financial pressures related to higher labor costs that the company is facing. Southwest Airlines

has had a difficult run since the COVID-19 pandemic brought the global commercial aviation industry grinding to a halt, and Boeing’s delivery days and a shifting post-pandemic travel landscape have undoubtedly hurt the carrier.

These labor cuts will see more than 1,750 corporate workers lose their jobs, which amounts to roughly 15% of the company’s office-based workforce. The airline projects savings of more than $210 million in 2024 and $300 million in 2025 as a result, both of which will be major elements of a cost-reduction plan that aims to see operational expenses fall by more than $500 million in annual costs by 2027. In this article, we will take a deeper look at the Southwest Airlines layoffs, and we will attempt to identify what the long-term impact of these layoffs could be.

What was the airline’s rationale for these layoffs?

For decades, Southwest Airlines had become known for maintaining a stable workforce and a customer-oriented mindset, with the company not even initiating large-scale layoffs during the financial crisis and the COVID-19 pandemic. The airline has long maintained a philosophy centered on maintaining happy employees, something which Southwest believes ensures that customers will remain satisfied. As a result, the airline has historically been able to maintain a reputation as a reliable and employee-friendly airline.

Southwest Airlines Boeing 737 aircraft at Atlanta shutterstock_1430520773

Photo: Markus Mainka | Shutterstock

Recent financial challenges, however, have put pressure on Southwest to reconsider its management approach. The airline has recently suffered from accelerating labor costs. Back in 2023, the airline’s non-fuel operating expenses (a common industry metric for cost analysis) had increased by over 10%, as a result of higher wages and health insurance costs for employees.

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During the current quarter, the airline’s costs remain projected to rise by another 9%. These continued rises in operational costs have taken a toll on the airline’s profitability, something which has pushed the airline’s operating margin down to the razor-thin level of just 2%. The airline is targeting an operating margin of about 10% by 2027.

Southwest Airlines Boeing 737 taxiing at DAL shutterstock_2334328221

Photo: Markus Mainka | Shutterstock

The airline is also facing pressure from delays in aircraft deliveries from Boeing, which have put a damper on the airline’s growth plans and kept the carrier’s operating expenses high as it is forced to keep older-generation less fuel-efficient aircraft in service on many key routes. The airline has attempted to reduce the impact of these delays in a few key ways (such as introducing red-eye flights and increasing turnaround time), but these strategies have not proven enough to overcome the cost challenges facing the airline.

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As a result, the airline decided to reduce its workforce to help reshape its cost structure. Southwest Airlines was quick to note that it does not take this decision very lightly and that it was a very difficult choice. Many industry analysts have been quick to note that increased pressure from activist hedge fund Elliott Management may also have played a role in the carrier’s decision, according to Reuters. In a statement, the carrier had the following words to share regarding its decision:

“The strength of Southwest’s culture is critical to the success of our business and our ability to serve our customers. Our people will continue to be what sets us apart as we drive the company forward.”

How the company will attempt to maintain an image of having an employee-oriented mindset will be difficult now that the airline has established that it will lay employees off when things go wrong. Many have speculated that the airline could be on an irreversibly downward trajectory, and over 1,700 employees are now in search of new work.

Southwest Airlines Boeing 737 in snowy conditions shutterstock_1305194392

Photo: Steve Heap | Shutterstock

The cultural impacts of these layoffs cannot be understated

Southwest’s decision has undoubtedly raised some concerns about the future of the company’s corporate culture. For a long time, the airline’s employee-friendly identity helped it recruit and attract talent and also helped the airline build a strong relationship with many of its customers. The announcement of these layoffs has created uncertainty among employees, as, even though there have not been staffing cuts to operational positions like pilots and flight attendants, many fear that these could soon follow.

Southwest Airlines Boeing 737 MAX departing Las Vegas Harry Reid International Airport LAS shutterstock_2127841190

Photo: Bradley Caslin | Shutterstock

On social media, employees have been quick to share messages of disappointment, with many noting their lack of confidence in the company’s ability to maintain its current identity in the face of extensive financial pressures. Southwest has been quick to note that it has offered affected employees severance packages and outplacement services. Nonetheless, time will tell whether Southwest will be able to maintain the level of trust it previously did with employees before this decision.

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Reactions from the financial industry on this week’s layoffs

While received extremely poorly by the airline’s employees, this week’s layoffs have had a major impact on investor confidence in the company. Southwest has been struggling over the last few years, and investors have been bearish on the stock, but this decision was marked by a strong shift in investor confidence in the company’s ability to address its financial challenges. In the immediate wake of the announcement, the airline’s stock price rose by nearly 7%, marking one of the company’s best days on Wall Street in months.

Southwest Airlines has been able to bring strong returns to its investors since the airline first came under fire from Elliott Management in August 2024. The airline’s share price has jumped by around 25% since then but remains far below pre-pandemic levels, according to Yahoo Finance. Nonetheless, this does demonstrate a continued increase in investor optimism surrounding the airline’s ability to improve its financial performance.

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Elliott’s leadership team has continued to praise the airline’s recent moves, such as adding six new directors to the airline’s board. Five of these directors were nominated by Elliott, which has insisted that its nominees bring a diverse range of expertise to the airline’s leadership team. Elliott has also been quick to note that stronger oversight and continued cost-cutting initiatives will be the key to the company’s ability to drive long-term shareholder value.

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So what are the strategic implications of this decision?

In the coming months, Southwest will have to face the challenge of meeting its financial targets while also maintaining an employee-centric culture, one which has long been a cornerstone of its business. The airline has projected more than $210 million in savings as a result of these layoffs this year alone, something which will undoubtedly help the company balance its books. However, the company is going to struggle due to having a 15% smaller workforce, putting increased pressure on the remaining employees.

Southwest 737 MAX 8

Photo: Carlos Yudica | Shutterstock

Nonetheless, these layoffs have been seen by financial analysts as an unfortunate but also necessary step toward putting the airline back on the path of financial success. The airline will need to continue to improve its operational efficiency to make sure that these layoffs will not need to be followed up by further staffing cuts. The airline will also need to find a way to maintain strong relationships with its employees.

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The carrier will certainly have an interesting few months.

The airline’s situation with Elliott Management also makes this situation even more complex. The hedge fund has a large amount of influence over the airline which it holds a large stake in, something which has forced it to undertake more cost-cutting efforts and alter its leadership team. While Bob Jordan remains the airline’s current CEO, he is under immense pressure to deliver financial results, as he has long been a target of Elliott’s criticism. Elliott does not hesitate to release letters to shareholders and hold special meetings where it thoroughly criticizes the airline’s management team.

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