Southwest Switches to Assigned Seats
“Our customers really, really, really want it,” says the airline's CEO—even though open seating has been an essential part of the brand for more than half a century.
Good Morning!
Here are today’s highlights:
The economy just had another robust quarter, but Ami Kassar sees some red flags.
What’s the best book ever written about sales? Jimmy Kalb has a surprise answer.
Consumers find an antidote to shrinkflation: TikTok.
Michael Raphael offers some specific examples of how he uses personality tests to improve his hiring.
BUSINESS TRAVEL
Southwest drops open seating: “Southwest Airlines will soon assign seats on flights and sell some with extra legroom, making sweeping changes in a bid to broaden its appeal to passengers and boost revenue. The plans, announced Thursday, also come as it fends off an activist investor pushing for an overhaul of the airline’s leadership and operating strategy. Open seating has been a hallmark of Southwest flights since the carrier got its start over 50 years ago. It was part of a business model that produced decades of uninterrupted profits and democratized flying in the process.”
“But Southwest executives said the company needs to adapt to what today’s customers want, marking what may be its biggest-ever shift. ‘This is the right change at the right time,’ Southwest Chief Executive Bob Jordan said in an interview.”
“It isn’t clear when flying with assigned seats and premium rows will start, but Southwest said bookings for them are expected to begin next year. The exact timing of the changes depend on the airline gaining regulatory approval and retrofitting its planes.”
“Fans of the airline have said they loved open seating. When flights were emptier, they could often land a window or aisle seat. That is happening far less frequently though, as planes are more packed.”
“The airline said it surveyed thousands of customers to understand what they want and what they would be willing to pay for. It found that 80 percent favored assigned seats—an overwhelming share that Jordan said took him by surprise: ‘Our customers really, really, really want it.’” READ MORE
THE ECONOMY
The U.S. economy turns in another robust performance:
FINANCE
Meanwhile, Ami Kassar doesn’t like the red flags he’s seeing: “In our work at MultiFunding, when we deal with the financing issues of small business owners and entrepreneurs around the country, our vantage point gives us some interesting insight into what is happening in the economy. A few months ago, we started to see shifts in the underwriting criteria of several small business lenders, which is often an indicator of troubling times ahead. I began to wonder if changes were coming. And now, I see more changes that I consider worrisome.”
“Over the last several weeks, we have received far more calls than usual from businesses that have hit cash walls or are approaching unexpected bumps in the road. Their businesses have slowed, and they are scrambling to figure out what to do.”
“When we try to help businesses with their capital needs, we review their profit-and-loss statements. These days, around half of the statements we see are down compared to last year. For a business in that situation, it is much more difficult to get a loan at a reasonable rate.”
“At our company, we have adjusted budgets and made some tough choices, including reducing personnel to weather this storm. These decisions are never easy.” READ MORE
Community Banks say they’re not affected by the commercial real estate crisis: “Small banks are feeling misunderstood. They see themselves as integral to neighborhoods across the country: backers of local dry cleaners, dentists and sandwich shops. Investors worry that those banks could be a crisis waiting to happen. The pride and the anxiety both reflect the fact that community banks are big lenders in the commercial real estate market, which has been rocked by falling property values as large office buildings sit empty.”
“But executives at these firms — which number about 4,100 in total — say there is an important distinction, and some industry analysts concur. They caution that small banks are being lumped in with lenders to the owners of half-empty towers in Manhattan, San Francisco and Chicago, which are in the most trouble.”
“Instead, a majority of commercial building loans by community banks are for smaller buildings — like those housing doctors and local businesses — that tend to be fully leased. And while there are concerns about financial pressure on apartment building landlords if interest rates remain high, missed payments on those types of mortgages have not risen substantially.” READ MORE
THE 21 HATS SOUNDING BOARD
On our Slack channel for paid subscribers, there’s an interesting discussion of business books, spurred in part by Jimmy Kalb’s explanation of how he started a book club at his business, Triad Components Group: “The way it started was somewhat simple. Employees wanted to leave the office early on Friday afternoons, and I wanted them to become better educated about business ideas and personal development. So what we came up with was that I would assign a book (based on my own readings) and purchase a hard copy of the book for each participant. The team is assigned about 60 minutes of reading per week. Then every Friday morning at 7:30 a.m., we meet via Teams to discuss that week's reading assignment.”
“I am the moderator and make sure to involve all of the participants. Often we get very lively discussions with multiple people wanting to express an opinion. If everyone comes prepared, then I agree to close the office at 3:30pm (normally we're open to 5 p.m.), giving them one hour of credit for reading the assignment and 30 minutes for starting work 30 minutes early.”
“We are just finishing our 27th book getting ready to start our 28th in August. I believe that our team is much better educated about some very complex business ideas.”
Jimmy provided a list of the books they’ve read, and most of the titles are pretty familiar—although one in particular isn’t exactly standard business-book fare. Asked about it, he responded: “It’s the best sales book ever—especially the part of overcoming objections, dealing with hostile customers, and offering alternative solutions.” SEE JIMMY’S BEST SALES BOOK EVER
MANUFACTURING
China’s vaunted manufacturing capability may be feared around the world, but it’s struggling at home: “With the property bubble that powered growth for years deflating, Beijing has been funneling investment into manufacturing, yet taking few significant steps to boost consumption that would soak up the resulting supply—mainly because Chinese leader Xi Jinping sees U.S.-style consumption as wasteful and contrary to his goal of making China an industrial and technological powerhouse. The ruling party reiterated that agenda at its twice-in-a-decade conclave this past week. To combat the property slowdown, Beijing will accelerate development of ‘emerging and future industries,’ such as electric vehicles and solar, a senior official said in a Friday press briefing.”
“The resulting overcapacity means that prices that producers charge at the factory gate have been in free fall for almost two years. That is dragging the overall economy closer to outright deflation, and eating into earnings. Around a quarter of the companies listed in mainland China are now unprofitable, compared with 7 percent a decade ago, according to a Wall Street Journal analysis of listed companies’ financial statements.”
“To compensate for weak domestic sales, Chinese companies have turned to exports, which were up 8.6 percent in June from a year earlier. But those exports have put pressure on jobs and industries in other countries, reminiscent of the so-called China Shock a quarter-century ago, when China’s entry into the global trading system squeezed manufacturers of toys, clothing, furniture and other labor-intensive products in the U.S. and beyond.”
“As a result, trade barriers to China are growing. Former President Donald Trump has raised the idea of 60 percent tariffs on all imports from China, while the European Union recently said it was increasing tariffs on Chinese electric vehicles. India, Brazil, and Turkey are pushing back against Chinese imports with restrictions and anti-dumping probes.” READ MORE
SOCIAL MEDIA
In the age of TikTok, you might want to think twice about trying shrinkflation: “No, Chipotle's servings have not shrunk as TikTokkers have suggested. But yes, Chipotle is reminding its workers to give customers big scoops. That's how the chain's CEO began his address to shareholders on Wednesday, referring to ‘portion concerns’ from a recent swirl of videos and Reddit posts that allege that Chipotle workers are skimping on fillings for its normally hefty burritos and bowls.”
“Chipotle has assessed its 3,500 restaurants to focus on those where consumer services delivered ‘outlier portion scores,’ [CEO Brian] Niccol said. The company is bringing more ‘training and coaching’ to those locations to make sure its bowls and burritos are consistently correct in size.”
“This comes a month after the CEO drew side-eyes for his earlier attempt to address the smaller-portion accusations, in which he denied the idea but also suggested that people could get ‘a little more rice or ... a little more pico’ with a slight nod and a knowing look at the worker fixing the meal.” READ MORE
In San Francisco, meanwhile, the owner of a burrito spot with rave reviews says he’d prefer bankruptcy to reducing his portions: “There were no free tables at Caliente Bistro Kitchen on a recent weeknight, but chef-owner Raul Garcia-Antolin couldn’t help but feel it was all about to go belly-up. Garcia-Antolin, 50, owes $42,886 in back rent, and he’s not sure he’ll make the next $5,747 rent bill either. The Richmond district restaurant owner said he hasn’t paid his landlord since November because he is spending more than he’s taking in to operate the business. Gross revenue during the period has been $700-$1,000 a day, he said. But with the rising costs of meat and produce, it takes $1,200 just to break even.”
“He has looked into getting a loan in order to stay afloat but doesn’t qualify because his bank account balance is too low. ‘I’ve gone through my life savings,’ Garcia-Antolin said. ‘I’m ready for Chapter 7, Chapter 13 [bankruptcy].’”
“‘Mexican food is the worst food to be selling right now,’ Garcia-Antolin said. ‘Steak is $5 a pound for tacos.’ Just over a year ago, beef was $3.80 a pound, and chicken legs were 69 cents. A receipt from Wednesday showed he paid $5.15 a pound for diced beef and $1.12 a pound for chicken legs.”
“After learning about Caliente’s financial problems and potential closure, some customers suggested that Garcia-Antolin charge more or reduce portion sizes. ‘For the ceviche, you guys could cut back the portion amount by like half,’ Outer Richmond resident Tony Wong told Garcia-Antonlin. Wong also suggested that he raise prices by 10 percent.”
“But Garcia-Antolin said the restaurant is known for large portions, as shown on its Instagram page. He’s worried he would lose customers if he charged more or served less. ... Social media marketing is especially important for the restaurant, Garcia-Antolin said, since Caliente is on a part of Geary Boulevard where foot traffic is low.” READ MORE
HUMAN RESOURCES
Do you use personality tests? In this week’s podcast, Paul Downs, Liz Picarazzi, and Jaci Russo get into a spirited discussion about whether the tests can help avoid or resolve personality conflicts. It turns out the three owners have very different takes on Myers-Briggs and the like. (Spoiler alert: Paul is not a fan.)
Michael Raphael of IndeVets offered this thoughtful response to the discussion on The 21 Hats Sounding Board: “There seemed to be some concern that these tests are meant to determine who is doing a job well -- or not. My experience has been that these tests are good at identifying the types of personalities that might thrive the most when doing a particular job. But they are in no way the only (or even most important) piece of the evaluation pie. We've had a lot of success building personality profiles for key positions and then comparing those profiles to candidates. It can be helpful in going through resumes and identifying questions for interviews.
“I've found that a lot of people can bring the right energy and messaging to an interview, but if their personalities don't match the job profile, they can be worn down by the job over time. A good example I've seen first hand are customer-facing positions like front desk employees at animal hospitals. These positions require people who enjoy -- and are energized by -- talking with other people all day. Someone who doesn't get energy from those interactions can sometimes show up the right way in an interview and even get the job.
“But over time, they are likely to be worn down by the daily grind. By identifying these personality traits before you hire, you save yourself -- and the employee -- a lot of potential pain. It doesn't always play out this way. But more often than not, these issues end up in a frustrated, annoyed employee. And someone who leaves the company after just a few months.”
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren