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Inside Southwest's plan for its future

A Southwest Airlines Boeing 737-700 lands at Ronald Reagan Washington National Airport in Arlington, Virginia, on May 7, 2023.

Nicolas Economou | Photo only | Getty Images

DALLAS – Southwest Airlines Executives laid out their vision for boosting profits to Wall Street on Thursday: more legroom seats starting in 2026, assigned seating, international partnerships and night flights. Southwest's new plan comes as its executives try to fend off activist Elliott Investment Management, which has called for a leadership change.

Southwest said its three-year plan will increase earnings before interest and taxes by $4 billion in 2027.

The airline also raised its third-quarter revenue forecast and said its board had approved $2.5 billion in share buybacks.

Southwest expects third-quarter unit revenue to rise up to 3% compared to the same period last year, after previously forecasting a decline of up to 2%, partly due to airlines rebooking passengers who had originally flown on. affected by the CrowdStrike outage in July.

Shares of Southwest rose more than 5% on Thursday and other airlines also closed sharply higher after oil prices fell nearly 3%.

Changes in the sky

Like many changes in the aviation industry, these new initiatives will not happen overnight. Southwest needs to train staff, update technology and inform customers of the changes.

Seats with extra legroom won't come to market until 2026 as the airline needs approval from the Federal Aviation Administration and time to retrofit planes, a slide from Thursday's investor presentation said. It is estimated that the new cabins, in which about a third of the seats will have more legroom, will generate earnings before interest and taxes of $1.7 billion in 2027.

The new seats will have at least 34 inches of legroom, compared to a standard pitch of 31 inches, the airline said.

Southwest has been under pressure to abandon its open seating model and often chaotic boarding process. Under the new plan, there will be no seat assignment until check-in for the cheapest ticket class, Wanna Get Away, similar to the current system. More expensive tickets offer more access to seats, but Southwest did not provide details of that process Thursday.

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“For canceled customers, the seating and boarding process is the primary reason they did not return to Southwest,” said Ryan Green, Southwest’s chief commercial officer. “We were impressed by how clear the message was. We definitely need to evolve our model to better meet customer preferences.”

Southwest also announced its first international partnership with Icelandair.

Bags still fly free

Southwest also said Thursday that it will stick to its longstanding policy of allowing customers to check two bags for free, saying it will generate “market share gains in excess of potential revenue losses from baggage fees.” Southwest executives call eliminating free checked bags a third option that would hurt bookings.

The carrier is also trying to reduce costs. On Wednesday, Southwest told employees it would cut service in Atlanta next year and potentially cut more than 300 flight attendants and pilots from the city to cut costs.

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The airline also announced Thursday that it would add Bob Fornaro, a respected industry veteran who previously served as the helm Spirit Airlinesto its board. Southwest and Fornaro have existed for more than a decade. He was CEO of AirTran, the airline with which Southwest merged in 2011, and served as a consultant to Southwest after the merger.

Under pressure

90s style Southwest Airlines flight attendant uniforms.

Courtesy of Southwest Airlines

The Dallas-based airline has made profits for nearly half a century in an industry known for ups and downs. It stayed true to its simple business model of flying Boeing 737 aircraft that offer a single class of service and shy away from complexity that could lead to higher costs. The company prided itself on customer-friendly policies like free checked bags and not charging customers change fees long before major airlines eliminated them on most tickets four years ago.

But in the years following the pandemic, pressure has mounted on Southwest CEO Bob Jordan and other executives as costs have risen, global travel has returned and competition has put pressure on high-end offerings like luxury lounges and more spacious seats to attract high-spending customers. Over the last decade, U.S. competitors have introduced basic economy fares and begun charging for things that were once free, such as: B. the seat reservation to charge fees.

Southwest has also changed, offering longer flights, including to Hawaii, and customers want more perks, convenience and technology, airline executives said.

Southwest Airlines raises summer revenue forecast and approves $2.5 billion in stock buybacks

Southwest has supported Jordan despite calls for his replacement by Elliott, which the company reiterated Thursday after its investor day presentation.

Elliott said in a statement that Thursday's announcements were “further evidence that Mr. Jordan lacks the vision and ability to implement these initiatives,” and said competitors had completed work on assigned seating and premium products more quickly . Jordan declined the timing, citing competitors' years of work modernizing cabins (edited)

Jordan said at the investor day presentation that the company remains open to working with Elliott, which owns about a 10% stake in the airline. On Tuesday, Elliott said an extraordinary shareholder meeting could be called as early as next week.

“We have demonstrated this willingness time and time again through our efforts and commitment, but Elliott has consistently shown little or no interest in working with Southwest to create greater shareholder value, instead focusing on how to do so “The latest letter shows “about the latest actions, about tactics and gamesmanship,” said Jordan. He called Southwest's plan deliberate and detailed.

“For Elliott to call this plan rushed and arbitrary is, in my opinion, crazy,” he said.

The airline expects delivery delays for aircraft Boeingincluding a not yet certified 737 Max 7, the smallest aircraft in the family. Without a smaller plane, Southwest cut unprofitable routes that might have been better served by planes with fewer seats to meet demand.

“We have taken dramatic steps to mitigate the operational risks of future Boeing delays by significantly slowing our growth and halting our hiring freezes,” Jordan said at Thursday's event, adding that the airline's total growth is expected to reach 2026 Increases in efficiency will be due to faster turning of aircraft and red-eye flights.

He said: “Previous financial problems caused by Boeing delivery delays and other Boeing problems were largely resolved through the use of loans for future deliveries.”

– CNBC’s Rohan Goswami contributed to this report.

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