Southwest Airlines Raises Q3 Forecast and Announces Strategic Updates
Southwest Airlines has raised its revenue forecast for the third quarter and announced significant changes to its business model in response to pressures from activist investor Elliott Investment Management. On Thursday, the airline revealed that it anticipates unit revenue to increase by as much as 3% compared to the same period last year, a notable adjustment from its previous forecast predicting a decline of up to 2%. This positive outlook is partially attributed to the rebooking of passengers affected by the CrowdStrike outage in July, which impacted multiple airlines.
In addition to the revenue boost, Southwest’s board of directors has authorized a substantial $2.5 billion share buyback program. This financial maneuver aims to enhance shareholder value amidst ongoing scrutiny from Elliott, which has advocated for leadership changes within the airline.
The airline also announced that Bob Fornaro, a respected industry veteran and former CEO of Spirit Airlines, will join its board of directors. Fornaro’s history with Southwest dates back more than a decade; he previously served as CEO of AirTran, which Southwest merged with in 2011, and later acted as a consultant for the airline.
As part of its strategic shift, Southwest executives presented their vision for the airline’s future during an investor day event at the company’s Dallas headquarters. CEO Bob Jordan and other senior leaders are under increasing pressure from Elliott to demonstrate a clear path toward profitability and revenue enhancement. To that end, Southwest has introduced significant changes to its long-standing business model, including the addition of assigned seating and extra-legroom options, both of which are expected to boost revenue.
However, many of these changes will take time to implement. For instance, the new extra-legroom seats will not be available until 2026, pending Federal Aviation Administration (FAA) approval and necessary aircraft retrofitting. According to the airline’s investor presentation, these new cabins will feature approximately one-third of the seats with additional legroom, expected to generate around $1.7 billion in earnings before interest and taxes by 2027.
The airline is committed to maintaining its long-standing policy of allowing customers to check two pieces of luggage for free, emphasizing that this policy helps gain market share that outweighs any potential lost revenue from baggage fees.
Despite these optimistic plans, Southwest faces challenges due to aircraft shortages resulting from delays with Boeing, particularly with the yet-to-be-certified 737 Max 7. The absence of smaller aircraft has led the airline to eliminate unprofitable routes that would have benefited from capacity adjustments to better meet demand.
Additionally, Southwest recently announced it would cut back service in Atlanta next year, potentially affecting over 300 flight attendants and pilots as part of its cost-reduction strategy. This follows earlier statements from Gary Kelly, the airline’s executive chairman and former CEO, about stepping down by the end of next year. Elliott has reiterated its call for leadership changes at Southwest following the release of the airline’s strategy presentation.
With these developments, Southwest Airlines aims to position itself for future growth while navigating the complexities of the current aviation landscape.
Sources: AirGuide Business airguide.info, bing.com, cnbc.com