How much will Southwest Airlines change to increase profits? Some details emerge

DALLAS (AP) — Southwest Airlines officials will explain Thursday how they restructure the airline to change with the taste of consumers – and perhaps keep their own job.

They will provide further details at an investor meeting about Abolition of so-called open seatingby charging extra for the best seats and introducing night flights.

The changes to some of Southwest’s peculiar habits are intended to reverse its shrinking profits and falling stock price and stave off a potential proxy war with hedge funds. Elliott Investment ManagementIt is unclear whether the changes will work, but they could leave an airline that bears little resemblance to to the southwest The customers know – a carrier that still has a core of enthusiastic fans.

Ahead of the meeting, the airline announced that, like all other airlines, it expects to start selling seats in the second half of 2025 and start flights under the new model in the first half of 2026. The open boarding system used so far for more than 50 years will disappear and passengers will be assigned seats, just like all other major airlines.

Southwest says its surveys show that 80% of its customers now know their seat before they arrive at the airport, rather than choosing among the available seats when boarding the plane.

Southwest has been considering a restructuring for months, but the push for radical change became even more important to management this summer when Elliott Investment Management took aim at the company because of its dismal stock performance since early 2021.

While Thursday’s meeting is aimed at investors, consumers will also learn more about how premium seating and flight boarding will work on the redesigned Southwest. In its announcement, the airline said it plans to sell a third of seats with up to five inches more legroom to generate more revenue per passenger.

However, the airline said it would continue to allow passengers to check two bags for free, calling the policy “by far the most important feature that sets Southwest apart from other airlines.”

U.S. airlines earned more than $7 billion in baggage fees last year, with American and United each taking in more than $1 billion. Wall Street has long argued that Southwest is wasting money.

But Southwest has spent years building advertising campaigns around flying free. Eliminating that benefit could change the airline’s DNA just as much — or perhaps more — than eliminating free seats. The airline said eliminating that policy “would reduce demand and far outweigh any revenue gains from charging and collecting baggage fees.”

Tom Fitzgerald, an airline analyst at TD Cowen, said investors would watch with interest to see whether Southwest introduces a discounted basic economy fare or makes changes to its Rapid Rewards frequent flyer program.

Another important issue, according to the analyst, is whether Southwest wants to reduce its flight connections next year instead of expanding them and whether the workforce should shrink further. Southwest expects to cut around 2,000 jobs this year through layoffs.

The company’s management is heading into investor day with the anger of a key stakeholder group: its own workforce. The airline told employees on Wednesday that it will make drastic service cuts in Atlanta next year, resulting in the loss of 340 pilot and flight attendant jobs.

“Our flight attendants are overwhelmed. They are paying the price for poor management decisions at Southwest Airlines,” added Alison Head, a flight attendant and union representative in Atlanta.

The unions are watching the fight between Elliott Investment Management and the airline’s management, but they are not taking sides. “This is a fight between Southwest and Elliott, and we’ll see how it plays out,” Head said.

But unions fear more of their members could be forced to relocate or commute long distances to keep their jobs. Southwest’s COO told employees last week that the airline would have to make “difficult decisions” about its network to improve its financial performance.

Elliott echoed that comment, saying Southwest executives are now “taking whatever actions – no matter how short-sighted – they believe will preserve their own jobs.”

The hedge fund controlled by billionaire financier Paul Singer now owns more than 10% of Southwest’s shares and is the airline’s second-largest shareholder. wants to fireCEO Robert Jordan and Chairman Gary Kelly and will replace two-thirds of Southwest’s board of directors.

Southwest relented this month, announcing that six directors will leave in November and Kelly will step down next year, but the airline is trying to protect Jordan.

Elliott increased pressure on Southwest this week by announcing it will call a special shareholder meeting as early as next week to approve a board shakeup. Elliott has a list of 10 possible candidates, including former airline CEOs.

“We do not support the current course of the company, which is being haphazardly pursued by a group of executives in pure self-preservation mode,” Elliott said in a letter to other shareholders this week.

Jordan shot back on Wednesday, saying it was Elliott who wanted to go it alone by launching “another public attack with negative press” rather than contributing to Southwest’s “transformation plan.”

“We are willing to compromise, but giving in to a single shareholder’s demand for control of the company is not a compromise,” Jordan said. “We have much to be excited about at Southwest, and we will not be distracted by Elliott’s public attacks.”

Before the event began on Thursday, Southwest announced a $2.5 billion share buyback program designed to increase the value of existing shares.

The airline also said its revenue ratio will increase by as much as 3% in the third quarter, rather than being flat to a 2% decline, in part because Southwest gained passengers from other airlines in the third quarter. CrowdStrike computer outage in July, which hit Delta Air Lines particularly hard. The company also appointed a former CEO of AirTran and Spirit Airlines to its board of directors.

Southwest shares rose 6% in premarket trading.

Shawn Cole, a founding partner of executive search firm Cowen Partners whose firm has worked for other airlines but not Southwest, believes Southwest is too isolated and should follow Starbucks’ example. and Boeing and hire an outsider as CEO. He believes many qualified executives would be interested in the job.

“It would certainly be a challenge, but Southwest is a well-respected airline that many people hold in high regard,” Cole said. “If Boeing can do it, Southwest can do it.”