How much will Southwest Airlines change to boost profits? Some details are emerging

[September 26, 2024]  By DAVID KOENIG

DALLAS (AP) — Leaders of Southwest Airlines are set to explain how they plan to remodel the airline to change with consumer tastes -- and maybe keep their own jobs.

They will give more details at an investor meeting Thursday about dumping so-called open seating, charging a premium for the best seats, and launching red-eye flights.

The changes to some of Southwest’s quirky habits are designed to reverse its shrinking profits and slumping stock price. It’s unclear whether the changes will work, but they could leave an airline that bears little resemblance to Southwest over the last 50 years — a carrier that still has a core of rabid fans.

Southwest has been contemplating 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 dismal stock performance since early 2021.

Elliott now owns more than 10% of Southwest shares and is the airline's second-biggest shareholder. The hedge fund wants to fire Chairman Gary Kelly and CEO Robert Jordan and replace two-thirds of Southwest's board.

Southwest gave ground this month, when it announced that six directors will leave in November and Kelly will step down next year. The airline is digging in to protect Jordan, however.

Despite its demand that heads roll, Elliott has said it wants to work with Southwest to improve the company's financial results. Southwest doesn’t seem interested in collaboration. It adopted a poison-pill defense to make an Elliott takeover more difficult.

Elliott, the hedge fund controlled by billionaire financier Paul Singer, increased its pressure on Southwest this week by saying that it intends to call a special shareholder meeting as soon as next week to make the case for a board overhaul. Elliott has a slate of 10 potential nominees, including former airline CEOs.

“We do not support the company’s current course, which is being charted in a haphazard manner by a group of executives in full self-preservation mode,” Elliott said this week in a letter to other shareholders.

CEO Jordan fired back on Wednesday, saying it is Elliott that wants to fly solo by lobbing “another negative press public ambush” instead of contributing to Southwest's “transformational plan."

“We’re willing to compromise, but acquiescing to a single shareholder’s demand for control of the company is not a compromise,” Jordan said. “There’s a lot to be excited about in Southwest, and we will not allow Elliott’s public attacks to distract us.”

While Thursday's event is aimed at investors, it will also be of keen interest to consumers, who should learn new details about how assigned seating and premium seats will work on Southwest. The open-boarding system it has used for more than 50 years will disappear, and passengers will be assigned seats, just like on all the other big airlines.

Southwest says its surveys show that 80% of its customers now want to know their seat before they get to the airport instead of picking among the open seats when they board the plane.

Southwest still lets passengers check two bags for free. Jordan said recently that Southwest has no plans to end that policy, but the airline has surveyed customers about it.

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.

A Southwest Airlines ticket agent checks in passengers at Love Field in Dallas, July 25, 2024. (AP Photo/LM Otero, File)

But Southwest has built years of advertising campaigns around bags-fly-free. Taking away that perk could change the airline's DNA as much as — or maybe more — than dumping open seating.

Tom Fitzgerald, an airline analyst with TD Cowen, said investors will be interested to see if Southwest introduces bag fees, a cut-rate “basic economy” fare, or offers changes to its Rapid Rewards frequent-flyer program.

The analyst said a major topic of interest to investors will be whether Southwest plans to reduce its flying next year instead of growing, and whether it plans to keep shrinking the workforce. Southwest expects to cut about 2,000 jobs this year through attrition.

Company management heads into the investor day having angered an important interest group: its own workforce. The airline told employees Wednesday that it will make sharp cuts to service in Atlanta next year, resulting in the loss of 340 pilot and flight attendant positions.

The pilots' union said it was “simply amazing” that Southwest was retreating in such a huge market “because this management group has failed to evolve and innovate.” That echoed a key Elliott talking point.

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

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

However, the unions are concerned that more of their members could be forced to relocate or commute long distances to keep their jobs. Southwest’s chief operating officer told employees last week that the airline will have to make “difficult decisions” about its network to improve its financial performance.

Elliott seized on that comment, saying that Southwest leaders are now “taking any action – no matter how short-sighted – that they believe will preserve their own jobs.”

Elliott’s demands include that Southwest bring in new leaders from outside the company, overhaul its board, and conduct a comprehensive business review to consider all options for increasing profitability.

The hedge fund succeeded in seeing its favored candidate become the new CEO at Starbucks earlier in September.

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 insular and should follow the recent examples of Starbucks and Boeing and hire an outsider as CEO. He thinks many qualified executives would be interested in the job.

“It would be a challenge, no doubt, but Southwest is a storied airline that a lot of people think fondly of,” Cole said. “If Boeing can do it, Southwest can do it.”

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