Summary
- Under pressure from external parties and its own financial underperformance, Southwest Airlines has introduced assigned seating and premium seat options.
- The new cabins, pending the approval of the Federal Aviation Administration (FAA) should be available in 2025.
- In Q2 2024, Southwest Airlines earned a net income of $367 million.
Under pressure from an activist investor and admitting that the airline has underperformed financially, Southwest Airlines executives have made monumental changes to its onboard experience, introducing assigned seating while also offering premium seat options for its customers.
Meeting customer demand and increasing revenues
The changes will be coming on all flights, with the airline admitting that while Southwest Airlines has been known for its unique open seating model for more than 50 years, preferences have evolved, which included passengers taking longer flights. As a result, seat assignment was preferred to ensure additional comfort.
“The research is clear and indicates that 80% of Southwest Customers, and 86% of potential Customers, prefer an assigned seat. When a Customer elects to stop flying with Southwest and chooses a competitor, open seating is cited as the number one reason for the change.”
Photo: Joni Hanebutt | Shutterstock
In addition to assigned seats, premium seating options will also be available to customers. These will offer extended legroom, with many customers preferring such options, according to the carrier.
The airline stated that one-third of its seats would offer extra legroom, which would be comparable to what its competitors have offered to passengers.
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However, Southwest Airlines warned that in addition to incorporating new technologies and procedures for a seamless transition, the new cabin layout will require the Federal Aviation Administration’s (FAA) approval. The carrier said that bookings should become available in 2025.
Furthermore, Southwest Airlines will introduce red-eye flights, which will begin operating in February 2025. The flights will be available on routes from Los Angeles International Airport (LAX) to Baltimore/Washington International Thurgood Marshall Airport (BWI), from Las Vegas Harry Reid International Airport (LAS) to BWI, from LAS to Orlando International Airport (MCO), from Phoenix Sky Harbor International Airport (PHX) to BWI, and from LAX to Nashville International Airport (BNA).
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Pressure from Elliot Investment Management
When the airline announced its Q1 2024 results, Bob Jordan, the president and chief executive officer (CEO) of Southwest Airlines, admitted that he was disappointed in its Q1 performance.
Still, Jordan added that there were efforts and progress underway to ensure that the carrier delivers the returns shareholders have expected from Southwest Airlines.
Photo: Angel DiBilio | Shutterstock
Jordan’s remarks came despite Southwest Airlines earning record-breaking Q1 revenues, with the company ending the three-month period with operating revenues of $6.3 billion, which were still shy of its aspirations.
“Separately, we are considering more transformational options and follow-on initiatives. That includes work previously underway to study customer preference around seating and our cabin.”
Now, the CEO stated that the new cabin experience will be a transformational change that cuts across almost all aspects of the company. While the open seating model has been part of the airline’s identity since its inception, research showed that it was the right choice made at the right time, Jordan said.
“We have been building purposefully to this change as part of a comprehensive upgrade to the Southwest experience as we focus on Customer expectations – and it will unlock new sources of revenue consistent with our laser focus on delivering improved financial performance.”
Jordan and the rest of the board of directors have been under pressure from Elliot Investment Management. The investment company had built a significant shareholding in the airline, with the board responding by setting up a poison pill, which would dilute Elliot Investment Management’s shareholding if it attempted to increase its stake in Southwest Airlines.
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Must-have changes
However, Southwest Airlines, Elliot Investment Management, and executives from the Southwest Airlines Pilot Association (SWAPA) have all admitted that changes were needed at the airline, as it has been struggling financially.
In particular, the investment firm has blasted the airline’s executives and its board for many things, including the fact that in the past 18 months, Southwest Airlines had issued eight guidance reductions.
Photo: Vincenzo Pace | Simple Flying
Elliot Investment Management called for a complete leadership change at the carrier with the plan ‘Stronger Southwest,’ and when the airline announced the addition of Rakesh Gangwal, an experienced airline executive with prior C-level roles at US Airways, Air France, United Airlines, and being the co-founder of IndiGo, the firm said that Gangwal would be “supportive of Southwest’s current leadership and status-quo approach […].”
On July 8, Elliot Investment Management continued pressuring the airline, publishing an open letter that said the feedback it had received was consistent with its perspective, once again reiterating that leadership changes were a must at Southwest Airlines.
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Southwest Airlines’ pilots reiterated that whatever will happen in the next few months, changes will be coming to the airline and its business model.
Return to profitability
Nevertheless, the airline’s announcement about the changes to its seating policy coincided with the publication of its Q2 results, with Southwest Airlines returning to profitability after a net loss of $231 million in Q1.
In Q2, the airline’s revenues were $7.4 billion, resulting in a net income of $367 million, with revenues growing 4.5% year-on-year (YoY). According to Southwest Airlines, this was another all-time quarterly record.
Commenting on the quarterly results, Jordan said that they were impacted by external and internal factors, falling short of what the company believed it was capable of delivering.
Photo: Markus Mainka | Shutterstock
“Our goal is to restore industry-leading margins and historical levels of Shareholder returns through our comprehensive plan to deliver transformational commercial initiatives, improved operational efficiency, and capital allocation discipline.”
Looking forward, Southwest Airlines said that its revenue per available seat mile (RASM), available seat miles (ASM), and cost per ASM (excluding fuel) would flat to down 2%, up around 2%, and up 11% to 13%, respectively, in Q3.
Its 2024 guidance, which includes ASMs growing by 4%, an operational fleet of 802 aircraft, and other metrics, has remained unchanged.
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