Southwest Airlines to end its brand-defining open-seating policy. Will it work?
Southwest to offer assigned and extra-legroom seats to attract premium travelers
Some analysts expect changes to contribute 95 cents a share to earnings next year
Elliott Management demands new leadership, calling changes 'too little, too late'
Pivot on strategy runs the risk of sparking backlash among Southwest fans
By Rajesh Kumar Singh
CHICAGO, July 29 (Reuters) -Southwest Airlines' LUV.N plan to eliminate open seating is one way for the company to raise much-needed revenue, but it comes with the risk of alienating loyal customers.
The unusual practice of letting passengers choose their own seats once they board the plane was created by Southwest's egalitarian-minded founder, Herb Kelleher, and has been central to the airline's brand image for more than 50 years.
But the feature is about to end, torpedoed by disappointing earnings and share performance since the pandemic and pressure from activist investor Elliott Management. The Dallas-based airline last week announced it would pivot to assigned seating instead. It plans to share more details at its investor day in September.
The company also plans to offer seats with extra legroom - yet another departure from Kelleher, who disliked dividing airline seating into different classes of service. Southwest said the new cabin layout will require approvals from the U.S. Federal Aviation Administration and is expected to be available for bookings in 2025.
The lack of assigned and extra-legroom seating has been one of the biggest obstacles to Southwest's ability to attract premium travelers, said Henry Harteveldt, founder of travel consultancy Atmosphere Research Group.
"As a business, you always want to give your customers a reason to pay you more," he said.
Investors and analysts say the company had little choice but to evolve. Shares have lost nearly half their value in the last three years, during a time when the S&P 500 index .SPX has gained 25%. The company's trailing price-to-earnings ratio is above 33, far exceeding the industry median of 4.86, and just two analysts of 18 have a "buy" rating on the stock, according to LSEG data.
Southwest needs new high-margin revenue streams to offset cost pressures and boost profit. Its operating margin declined to 0.2% in the first half of this year from more than 13% in 2019.
Analysts at Raymond James expect the changes to contribute 95 cents a share to the airline's earnings next year. Rivals such as Delta DAL.N, United UAL.O and Alaska Airlines ALK.N have been relying on big-spending premium travelers to protect their profits.
Last week, Southwest CEO Bob Jordan called the change a "strategic transformation" that could generate more than $1 billion in annual revenue and broaden the airline's appeal.
Analysts say Southwest's success hinges upon its ability to market and sell the changes and break in to a market it has never served before.
"Expectations should be tempered that assigned seating is a lightswitch change for Southwest," said Conor Cunningham, an analyst at Melius Research.
Elliott Investment Management did not see it that way either, dubbing the changes "too little, too late," reiterating its demand for new leadership. The firm is trying to oust CEO Jordan and board chair Gary Kelly, saying the company needs fresh perspectives.
Last Thursday, Jordan said while the company wanted to hear Elliott's feedback, the activist investor had not shown willingness to engage in any meaningful conversations.
Southwest considered abandoning open seating and switching to assigned seating in 2006 but dropped the idea after tests showed the move might hurt its efficiency and increase boarding time by 1 to 4 minutes. The switch could also drive up labor costs as Southwest could need more agents for boarding.
How customers will respond is unclear. Jordan said the company surveyed tens of thousands of customers, with many citing its open seating policy as the No. 1 reason for deciding to stop flying with Southwest and choose a rival.
Some travelers wondered if the company would also do away with its policy of no fees for bags. Jordan has said the company has no plans to start charging for bags, adding that the airline's data shows that a no-bag-fee policy is the No. 1 reason customers choose to fly Southwest.
To some customers, though, the end of open seating is a major blow to the airline's uniqueness.
"Southwest, I fear you are losing your differentiation with this choice," Robb Winger, who called himself a Southwest "loyalist," wrote on LinkedIn.
Southwest shares have largely lagged the S&P 500 passenger airlines index https://reut.rs/4d26jfI
Reporting by Rajesh Kumar Singh in Chicago, Additional reporting by Shivansh Tiwary in Bengaluru, Editing by Matthew Lewis
Mga Kaugnay na Asset
Pinakabagong Balita
Disclaimer: Ang mga kabilang sa XM Group ay nagbibigay lang ng serbisyo sa pagpapatupad at pag-access sa aming Online Trading Facility, kung saan pinapahintulutan nito ang pagtingin at/o paggamit sa nilalaman na makikita sa website o sa pamamagitan nito, at walang layuning palitan o palawigin ito, at hindi din ito papalitan o papalawigin. Ang naturang pag-access at paggamit ay palaging alinsunod sa: (i) Mga Tuntunin at Kundisyon; (ii) Mga Babala sa Risk; at (iii) Kabuuang Disclaimer. Kaya naman ang naturang nilalaman ay ituturing na pangkalahatang impormasyon lamang. Mangyaring isaalang-alang na ang mga nilalaman ng aming Online Trading Facility ay hindi paglikom, o alok, para magsagawa ng anumang transaksyon sa mga pinansyal na market. Ang pag-trade sa alinmang pinansyal na market ay nagtataglay ng mataas na lebel ng risk sa iyong kapital.
Lahat ng materyales na nakalathala sa aming Online Trading Facility ay nakalaan para sa layuning edukasyonal/pang-impormasyon lamang at hindi naglalaman – at hindi dapat ituring bilang naglalaman – ng payo at rekomendasyon na pangpinansyal, tungkol sa buwis sa pag-i-invest, o pang-trade, o tala ng aming presyo sa pag-trade, o alok para sa, o paglikom ng, transaksyon sa alinmang pinansyal na instrument o hindi ginustong pinansyal na promosyon.
Sa anumang nilalaman na galing sa ikatlong partido, pati na ang mga nilalaman na inihanda ng XM, ang mga naturang opinyon, balita, pananaliksik, pag-analisa, presyo, ibang impormasyon o link sa ibang mga site na makikita sa website na ito ay ibibigay tulad ng nandoon, bilang pangkalahatang komentaryo sa market at hindi ito nagtataglay ng payo sa pag-i-invest. Kung ang alinmang nilalaman nito ay itinuring bilang pananaliksik sa pag-i-invest, kailangan mong isaalang-alang at tanggapin na hindi ito inilaan at inihanda alinsunod sa mga legal na pangangailangan na idinisenyo para maisulong ang pagsasarili ng pananaliksik sa pag-i-invest, at dahil dito ituturing ito na komunikasyon sa marketing sa ilalim ng mga kaugnay na batas at regulasyon. Mangyaring siguruhin na nabasa at naintindihan mo ang aming Notipikasyon sa Hindi Independyenteng Pananaliksik sa Pag-i-invest at Babala sa Risk na may kinalaman sa impormasyong nakalagay sa itaas, na maa-access dito.
