By Rajesh Kumar Singh
CHICAGO (Reuters) -Southwest Airlines on Thursday unveiled a slew of initiatives to turn around its struggling business, including partnerships, vacation packages for customers and sale-leaseback transactions for aircraft.
The measures boosted investor confidence and Southwest shares were up about 8% in afternoon trading. But the steps failed to impress activist investor Elliott Management, which has been pressing for a shakeup of top management. The hedge fund said the plan was “filled with long-dated promises of better performance” but called for “credible leadership”.
“Another promise of a better tomorrow from the same people who have created the problems we face today,” it said in a statement.
Elliott has been campaigning to oust CEO Bob Jordan and replace two-thirds of Southwest’s board of directors, blaming them for the airline’s underperformance. Elliott plans to request a special shareholder meeting as soon as next week.
The initiatives announced on Thursday augment previous plans to switch to assigned and extra-legroom seats to attract premium travelers, and start overnight flights. The carrier, however, will continue with its bags fly free policy.
The company also boosted its third-quarter revenue forecast and announced a new $2.5 billion share buyback program.
Southwest said these measures would contribute about $4 billion in incremental earnings before interest and taxes (EBIT) by 2027. It expects to produce at least a 10% operating margin, 15% return on its invested capital and more than $1 billion in free cash flow in three years.
Savanthi Syth, airline analyst at Raymond James, said the 2027 targets were encouraging but the airline must deliver.
The low-cost carrier has been hard-pressed for new high-margin revenue streams as costs have ballooned.
The company’s operating margin fell to 0.2% in the first half of this year from more than 13% in 2019, passenger volumes are running below pre-pandemic levels and shares have slid about 40% in the past three years.
It has downgraded its outlook at least eight times in the past 20 months despite booming travel demand. Analysts expect profit in 2024 to plunge about 83% from a year ago.
Questions have been raised about its business model, with Elliott saying the airline was too rigidly committed to a playbook developed decades ago.
At the company’s first public investor meeting since 2022 in Dallas on Thursday, CEO Bob Jordan acknowledged the company needed to evolve and transform. “Our model is not broken but it is in need of continued calibration and enhancement,” he said.
While Southwest has offered the hedge fund some concessions, it has repeatedly backed Jordan, calling him the “right leader” to execute a “significant transformation” and improve results.
FLEET MONETIZATION PLAN
Before COVID-19 restrictions, Southwest boasted a record 47 consecutive years of profit. But aircraft delivery delays by planemaker Boeing and post-pandemic travel patterns have depressed earnings.
To mitigate the operational risks, Southwest plans to slow annual capacity growth between 1% and 2% between 2025 and 2027, and minimize hiring.
Southwest said this has reduced its aircraft needs, opening opportunities to monetize the value of its Boeing 737 fleet. The airline said it is considering selling its new planes to leasing companies.
Shortages of new aircraft have made so-called sale-and-leaseback transactions a moneymaker for some airlines. Southwest has nearly 700 new Boeing aircraft on order through 2031.
The company said it will launch a partnership with Icelandair in early 2025 for transatlantic connectivity. It plans to add at least one additional partner carrier next year.
It will also start selling vacation packages to customers.
Southwest appointed Robert Fornaro, former chief executive of AirTran and Spirit Airlines, to its board.
(Reporting by Rajesh Kumar Singh; Editing by Deepa Babington, Chizu Nomiyama and David Gregorio)
