Postcards: The Southwest Turnaround (Also... Why We're Red and In Cash)

Something significant happened this morning... for a company that has seen its stock price drop 25% over the last 12 months. And we're Red on S&P 500 ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: The Southwest Turnaround (Also... Why We're Red and In Cash)]( Something significant happened this morning... for a company that has seen its stock price drop 25% over the last 12 months. And we're Red on S&P 500 [Garrett {NAME}](floridarepublic) Jul 25 floridarepublic   [READ IN APP](   Market Update: We’re red… and this has gone very quickly. Outflows on the SPY are very strong, and investors are advised to maintain cash for now. Pay close attention to the RSI and the MFI on the SPY and the NASDAQ. When both hit oversold, we tend to see a bounce from algorithms. As I noted over the weekend, markets were the most aggressively long on equities ever, and as I said yesterday, don’t be shocked to see the market drop even if small-caps are getting bids. Enjoy your life while this bit of volatility unfolds. [Catch up on our Six Rules for Negative Momentum here](. Even energy has turned negative, which is VERY bearish. We can take advantage of this when Occidental (OXY) breaks under $60 by trading in the Buffett buy zone. --------------------------------------------------------------- Dear Fellow Expat: There’s only one direct flight between Fort Myers and Baltimore. [It’s on Southwest.]( And as I’ve noted, that direct flight delivers something that no other numbered flight in America can provide: Miracles. I’m not sure what it is… somewhere in the clouds - perhaps that particular part of the jet stream cures arthritis. Maybe the sun shines brighter through the windows, delivering Vitamin D to the passengers. Or - dare I say - that God himself delivers ointment to the sick. But every time… [from Baltimore to Fort Myers, a religious revival happens]( all the pre-boarders who required wheelchairs to get down the ramp to the plane… magically rise as one when the plane lands in Florida and run up the ramp from their cozy front-row seats… Well… that’s all going to end. No more religious revivals. No more unassigned seats. In what I believe to be one of the smartest corporate decisions of the last 12 months, Southwest is now aggressively engaging in a turnaround strategy to maximize revenue. Today, I want to explain why this decision isn’t just wise - Open Seating - the ability to pick your seat based entirely on the time you checked in - should NEVER have been a business practice. [Upgrade to paid]( On Open Seating (It’s a Dumb Practice) If you’re thinking, “Garrett, I liked open seating…” Well… I have news for you. You’re statistically in the 20% of passengers who did. Open Seating is a terrible business practice for two reasons. And both have to do with the “Customer Experience.” First, one of Southwest's most essential company drivers is its customer experience. We’re defining drivers as a combination of how an MBA program would argue that companies create competitive market advantages. But more simply, let’s define it as something that “binds the customer to the brand,” as Porter Stansberry recently said on his new podcast that will launch in August. Think about Southwest for a moment. One of the core things that drives customers to choose Southwest is its reputation for the customer experience. Its company culture emphasizes a positive corporate culture, with engaged and motivated employees delivering exceptional customer service. Even at 6 a.m., the person behind the desk is smiling… composing themselves…, and thinking I will keep smiling and helping even if this person handing me a ticket starts screaming across the airport. What else is part of that experience? Consider their reputation and marketing for “no hidden fees.” The company doesn’t charge for your first two checked bags or change fees. You might not know it, but your brain does. These things enhance customer satisfaction and loyalty. So… Customer Experience is baked into the culture. And yet, Open Seating is perhaps one of the worst practices in customer experience, not just in the airline industry… but anywhere in American business. Why? In a press release this morning, Southwest noted: “The research is clear and indicates that 80% of Southwest Customers, and 86% of potential Customers, prefer an assigned seat. When a Customer elects to stop flying with Southwest and chooses a competitor, open seating is cited as the number one reason for the change.” The number one reason why people stop flying is because of Open Seating. That might be strange to anyone who likes the practice. But consider a few things. Open seating can be a detriment for several reasons: Passenger Anxiety Some passengers experience anxiety over not having an assigned seat, which can lead to a less pleasant travel experience. You have to sign into an app precisely 24 hours before the flight. You have to line up. You have to scramble for overhead seating. It’s not a joyful experience. It is stressful. Boarding Process Confusion While Southwest uses a boarding group system to organize the process, it can still be confusing and stressful for passengers who are unfamiliar with it. I have witnessed more arguments and fights over the fact that someone is two numbers ahead of their assigned number in the line than at any other event where people are traveling or engaging in something that requires a ticket. Again, passenger stress creates emotions before you do one of the most stressful things I can think of without a cocktail: Take to the skies. Group Travel Issues Families and groups may need help sitting together, causing dissatisfaction and frustration among travelers who prefer to be seated with their companions. This is always an issue on flights, with parents required to sit with their children in nearly every case. It requires a volunteer to make a move, and if they don’t, Southwest will pick someone to move. That goes against the customer experience model. Customer Perception This is a big one: Quality. Some passengers think open seating needs more organization and higher service quality than airlines that offer assigned seating, potentially impacting the airline's reputation. What is supposed to be convenient is a detriment to Southwest's brand. This is a classic example of executives not fully understanding the customer experience and weakening their brand reputation because they believe “financial value” is more important in the chain of command than the customer’s perceived value of the specific seat they purchased - even if it’s at a premium. Time Efficiency Although Southwest claims that open seating speeds up the boarding process, some studies suggest that assigned seating with optimized boarding procedures can be just as efficient or even faster. [There are extremely efficient ways to board a plane]( but companies don’t do them because they appear disorganized, and families want to board together. The reality is that they should just board like every other company in the world - by zones, and then focus on other value drivers to enhance the experience. Competition Finally, as I noted, just do what everyone else does because, based on customer surveys, open seating has no competitive advantage. Competing airlines offer assigned seating, which can be a deciding factor for passengers who prefer knowing where they will sit ahead of time, driving them to choose other carriers over Southwest, as the company said. In many ways, open seating was a solution to a problem. However, it created several other issues that are driving customers away. Southwest is eliminating the practice and focusing on a handful of different elements to drive greater efficiency. One of them is RedEye flights. You might not think this is a good idea, or you don’t like taking Red Eyes… But this decision aligns perfectly with another core value driver of the company. Operational Efficiency. The company’s low-cost structure is primarily managed by efficient operations, including quick turnaround times, fuel-efficient practices, and a standardized fleet (primarily Boeing 737s). However, ensuring that their planes are in the right place at the right time is a massive issue for the company. If a plane isn’t at a specific airport, its lean operations can lead to cancelations and delays throughout the day. Many individual aircraft fly the same route over and over again. However, one single failure to get a plane to a destination on time has a ripple effect. The company’s “Point-to-point” model is different than traditional airlines, which ioperate on a “hub-and-spoke model,” The point-to-point route structure reduces layovers and operational costs. Red Eye flights won’t just generate money for the company out of Las Vegas. It is a strategic decision that will enhance its efficiency on aircraft management. What Else Drives Southwest’s Model? The company is currently in an activist battle with Elliott Management, which has pushed for various strategic changes across the business model. But most activists want the company to focus on what has made it successful for so long and not deviate from the things that enhance customer and shareholder value. As I said, its low-cost structure drives efficiency across the business, and customer service is a hallmark of the company’s ability to attract customer loyalty. However, there are other key drivers that we should monitor. If the company also focuses on new initiatives that maximize the potential of these elements, we could see a successful turnaround and a stock starting to bottom out after a dismal year. Southwest stock is now trading at levels we haven’t seen since the bottom of the March 2020 crisis. Other core elements of the business include: Brand Loyalty The company’s frequent flyer program, Rapid Rewards, is one of the most reputable programs in the business (it’s no Delta Skymiles, though). This program enhances repeat business with simple redemption options that improve customer experiences. This is all within its strong brand identity centered around friendliness, reliability, and value. Revenue Management The company’s dynamic pricing model can adjust fares based on demand and optimize load factors. With a new seating pricing model, the company should be able to maximize its revenue by maintaining low-cost options but placing enhancements on various seats in the plane that would be regarded, especially for frequent flyers. This will impact its sources of ancillary revenues like EarlyBird Check-In. However, the company should still be able to maintain its in-flight sales and success with co-branded credit cards. Market Position Southwest has an extensive and strategically selected route network. It operates in high-demand markets and strategically underserved routes. It will likely continue expanding into new markets and international destinations, but it will likely focus on expanding revenue now. Technology At the heart of the business is its investment in technology that enhances operational efficiency, customer service, and user experience on digital platforms. Those investments have fueled innovative practices to optimize flight routes and maintain the low-cost structure, and this isn’t going away. Opportunity Ahead We will continue to monitor Southwest, but I love that Elliott is involved and that the board of directors has been so receptive to these changes. This shows the type of forward-thinking necessary while ensuring that the company returns to what makes it successful. While airlines are a difficult business, they aren’t difficult to trade. [At Republic Insider, we’ve been active in selling put spreads on Southwest since the Elliott Management announcement.]( this news has fueled a nice pop in the stock that will deliver a double-digit win for us. [Check us out right here.]( Meanwhile, you must learn about the businesses that you want to own and trade. Remember - companies don’t make money from “magic.” They do this because they have a unique competitive advantage that makes customers want to engage with the business and the brand. It is the beauty of capitalism, the identity of what makes a business unique. At Republic Research, we’ll continue combining MBA-style analysis with financial journalism and humor. Because when you do fall in love with a company - you’re far more likely to have real conviction - to want to own a business, stick with the business, and analyze it because it’s YOUR money… and your time. As you know, we have always loved the Three Ds; they are AI companies that you didn’t know that they were… [Deere (D)]( [Domino’s (DPZ)]( and Delta (DAL). We love niche businesses with dominant market share in Zoetis (ZTS), BIC (BICEY), and multiple pipeline companies. We’re also warming up to a food verification name called Where Food Comes From (WFCF). Always check back with us. Once a week, we’ll examine a company like Southwest to determine what activists and other investors are doing to help get it back on the right path. And check back in the next week or so for the release of Porter’s new podcast - as we’re in the final editing stages. You’ll learn about one of America’s most iconic companies when it’s time to buy the stock, and what binds the company to its iconic brand. Stay positive, Garrett {NAME} Secretary of Aircraft Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()