Southwest Airlines' open seating to end as it looks to lift earnings
Adds comment from Elliott Investment in paragraphs 15, 16
By Rajesh Kumar Singh and Shivansh Tiwary
July 25 (Reuters) -Southwest Airlines LUV.N announced sweeping changes on Thursday, including plans to end open seating that has been the hallmark of its brand for decades as it faces investor pressure to improve results and shore up its share price.
Earnings have been under pressure in recent quarters, partly because of delays in plane deliveries from Boeing BA.N, which have hit revenue and worsened cost pressures. Southwest is also facing pricing pressure as an industry-wide overcapacity in the domestic market has dampened airfares.
But Southwest's shares have lost about 30% of their value over the past two years, during a time when the broad-market S&P 500 has gained about 37%. Activist investor Elliott Investment Management is pushing for leadership changes, saying the company needs fresh perspectives to compete in the modern airline industry. It has warned of a proxy fight.
Southwest CEO Bob Jordan said on Thursday that Elliott has not shown willingness to engage in any meaningful conversations, adding that the airline is taking steps to transform itself and hit its financial goals.
"We do see this as a fundamental transformation of Southwest Airlines," Jordan said on the company's earnings call.
That includes the end of open seating that the company has been known for since the 1970s when it started operations, driven by its founder, Herb Kelleher.
Shares rose 6% at $28.31 in afternoon trade.
While all U.S. carriers are facing pressure to discount fares due to an excess supply of seats in the domestic market, airlines like Delta DAL.N and United UAL.O are leaning on long-haul international flights and high-margin premium cabins to protect their profit.
Southwest currently doesn't offer these products, but said on Thursday that it now plans on offering seats with extra legroom on its airplanes.
The company's research shows that 80% of its customers, and 86% of potential customers prefer an assigned seat. It also plans to offer premium, extended legroom seats, which will account for roughly one-third of seats across its fleet.
The company 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.
U.S. carriers have been reporting strong demand for high-margin premium cabins. Alaska Airlines ALK.N last week said it would add 1.3 million premium seats annually to its mainline fleet.
The company said adding premium seats will require little investment, without offering more details. It did not quantify the boost to its earnings and revenue, either.
Southwest plans to share more details at its investor day in September. It will also start overnight flights in February.
"Southwest's announcement of revenue-enhancement initiatives, purporting to offer assigned seating, premium-seating options and redeye flights, comes more than a decade late," Elliott Investment said in a statement.
Elliott also reiterated its call for a new leadership at the carrier.
Jordan said the company currently has no plans to start charging for bags, adding the airline's data shows that a no-bag fee policy is the number one reason customers choose it.
Southwest said it was in discussions with Boeing about the negative financial impact it faces from delayed deliveries. It expects compensation in the form of price discounts.
It expects third-quarter unit revenue to be flat to down 2% year-on-year, while non-fuel operating costs are estimated to be up 11%-13%.
TD Cowen analyst Thomas Fitzgerald said Southwest's outlook implies losses in the current quarter and breakeven in the fourth quarter.
Southwest's second-quarter adjusted profit came in at 58 cents per share, compared with analysts' average estimate of 51 cents per share, according to LSEG data.
Reporting by Rajesh Kumar Singh in Chicago and Shivansh Tiwary in Bengaluru; Additional reporting by Aishwarya Jain in Bengaluru; Editing by Pooja Desai, Nick Zieminski and Daniel Wallis
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
