Southwest unveils major overhaul under investor pressure

The airline will also repackage its sale of vacation packages. It will seek partnerships with international airlines, starting with Icelandair next year, that executives say will make Southwest credit cards and frequent-flyer program more attractive.

The changes will amount to the biggest ever at Southwest, which is the original low-cost airline but is now well into middle age and suffering from sagging financial results.

Southwest executives pitched the new offerings as they came under increasing pressure from an activist investor who wants to replace the airline’s management and force a review of its strategy. Southwest’s annual profit is on pace to decline for a third straight year, and its stock price has fallen by more than half since early 2021.

“Our model is not broken,” CEO Robert Jordan declared, but he said it needs tweaking and “enhancement.”

“We are not producing the financial results that we are capable of delivering,” he said at a meeting with investors at the airline’s Dallas headquarters.

Southwest said its multi-year plan, including changes to its flight network, will add about $1.5 billion in pretax earnings in 2027.

Southwest had previously given the outlines of changes including assigned seating and extra-legroom seats, but it gave more details about them Thursday.

Executives detailed how each of Southwest’s four airfare tiers will come with perks that get better as the price rises. Executive Vice President Ryan Green said the cheapest fares will not allow customers to pick a seat when they book a flight, which could increase the incentive for consumers to move up to the next fare level.

Jordan said it will take time to make significant changes at an airline with 800 planes.

Southwest’s reservation system is capable of handling assigned seating, Jordan said, but “we have dozens and dozens of other systems of the company that are geared for open seating … and those have to be changed.”

“There is a lot of risk if you do this poorly,” the CEO said.

Southwest stopped short of changing another of its longtime characteristics: letting passengers check up to two bags for free, a break from fees that are charged by all other leading U.S. airlines. Executives said it’s the most important feature in setting Southwest apart from rivals.

U.S. airlines brought in more than $7 billion in revenue from bag fees last year, with American and United reaping more than $1 billion apiece. Wall Street has long argued that Southwest is leaving money behind.

Southwest, which has built years of advertising campaigns around bags-fly-free, estimated that bag fees would raise about $1.5 billion a year, but eliminating the perk could drive away passengers, costing the airline $1.8 billion, or a net loss of $300 million a year.

Southwest had contemplated an overhaul for months, but the push for radical change became even more important to management this summer, when Elliott Investment Management targeted the company for its weak financial performance in recent years.

The hedge fund blames Southwest leaders, portraying them as hidebound and insensitive to changing consumer tastes. Elliott, controlled by billionaire financier Paul Singer, wants to replace Jordan and most of the Southwest board.

The hedge fund dismissed Southwest’s turnaround plan as too little, too late.

“Another promise of a better tomorrow from the same people who have created the problems we face today,” two Elliott officials said in a statement. “Without credible leadership that can execute, this plan — filled with long-dated promises of better performance — risks becoming the latest in Southwest’s long series of failed improvement initiatives.”

Elliott, the airline’s second-largest shareholder, said it plans to call for a shareholder meeting as soon as next week that could include voting on Southwest directors. Elliott has a slate of 10 board candidates, including former airline CEOs.

Southwest gave ground this month, when it announced that six directors will leave in November and Chairman Gary Kelly will step down next year. On Thursday, it named a former AirTran and Spirit Airlines CEO to its board, which now numbers 16.

Jordan argued that the plan he has laid out should satisfy investors.

“We do not believe that a proxy fight is in the best interest of the company, and we remain willing to work with Elliott on a cooperative approach,” Jordan said.

Before Thursday’s event started, Southwest announced a $2.5 billion share-buyback program designed to make existing shares more valuable.

Southwest also said that third-quarter revenue will be better than expected partly because it gained passengers who were stranded by other airlines during the CrowdStrike global tech outage in July. Delta Air Lines was particularly hard hit by the outage.

Shares of Southwest Airlines Co. gained more than 5%.