Southwest Airlines Co. said Thursday that it will go ahead with its plans to assign seats and offer premium seating options with more legroom. This means that the airline will no longer have its famous “open-seating” policy. The company is trying to get back to making money after losing money in the first quarter.
Southwest also said it would change the way people board and start flying at night. When the news came out, the stock went up 6%.
As the airline
The company, LUV 6.67%, announced the move right before reporting earnings for the second quarter that were better than expected. However, it gave cautious guidance and CEO Bob Jordan said the company is still not doing as well as it could be.
Southwest made a big change with its new seating policy. In April, when it reported a bigger-than-expected loss for the first quarter and revenue that fell short of expectations, the company said it was looking into the possibility of making such a change.
Elliott Management, a hedge fund with an 11% stake in the carrier, has been campaigning as an activist shareholder to change the airline’s seating policy. They want to “upgrade” the leadership and do a full review of the business strategy.
Elliott says it has ideas for how to raise the stock’s value by 77% in a year. Early in July, Southwest put in place a “poison pill” to stop Elliott from making a hostile offer.
The airline said in a statement, “In addition to meeting customer demand, the new amenities are expected to bring in more money and improve financial performance.”
The company put Ryan Green in charge of commercial transformation as executive vice president to help with the cause. Green is in charge of changing the cabin and used to be executive vice president and chief commercial officer.
He has also been in charge of changing the company’s digital customer experience and Rapid Rewards loyalty program. In his new job, he will answer to Jordan.
Green, in prepared remarks, said, “Together, these strategic initiatives play an important part in the airline’s overall plan to meet customer needs, increase shareholder value, and keep the unique culture, hospitality, and flexibility that make Southwest Southwest.”
Southwest said that about 80% of its customers and 86% of people who might buy from them would rather have a reserved seat. There are already tickets on sale for red-eye flights that start on Valentine’s Day 2025 and go straight to five cities: Las Vegas to Baltimore and Orlando, Fla.; Los Angeles to Baltimore and Nashville, Tenn.; and Phoenix to Baltimore.
At an investor day set for late September, the company will give more information.
Southwest also reported a net income of $367 million, or 58 cents per share, for the second quarter. This was less than the $683 million, or $1.08 per share, it made during the same time last year.
When one-time items were taken into account, it had 58 cents in earnings per share, which was more than the 52 cents that FactSet predicted.
Sales went up 4.5% to $7.354 billion, which was also more than the $7.322 billion consensus estimate from FactSet.
As planned, Jordan said, “Our performance in the second quarter was affected by both internal and external factors and fell short of what we believe we are capable of delivering.”
“Urgent and deliberate steps” are being taken by the airline to deal with short-term revenue problems and start “long-term transformational initiatives that are designed to drive meaningful top- and bottom-line growth,” he said.
CFRA kept its “hold” rating on the stock but lowered its price target by $2 to $26. This is because, according to CFRA, “the company is no longer deserving of its above peer multiple due to the decline in margins in recent years.”
Analyst Zachary Warring said that the changes to the seats might make the airline’s customers unhappy.
“We are neutral on shares because we think the U.S. consumer is starting to crack while capacity stays high and [Southwest’s] multiple stays high,” Warring wrote in a note to clients.
Analysts at TD Cowen didn’t think it would make a big difference.
Analysts Thomas Fitzgerald and Helane Becker wrote in a note that the initiatives “are needed, but are unlikely to be enough to turn the tide.” They thought the stock would go down and investors would worry about how the airline would handle a strategic change while it was losing money or making only a little money.
Southwest now thinks that revenue per available seat mile will be flat to down 2% in the third quarter. It thinks that the average number of seat miles will go up by about 2% and that the cost of fuel per gallon will be between $2.60 and $2.70. The price of an available seat mile is likely to go up by 11% to 13%.
It thinks that the price of gasoline will be between $2.70 and $2.80 per gallon in 2024. It still thinks that the number of available seat miles will go up by about 4% and the cost of each available seat mile will go up by 7% to 8%.
The business thinks that unit sales will stay the same or go down by 2% in the third quarter.
For other news, the company said it got five Series 8 planes during the quarter and retired six Series 700 planes and one Series 800 plane, leaving the company with a total of 817 planes. The only planes in the company’s fleet are Boeings.
Because of expected delivery delays and ongoing talks with Boeing, Southwest is now planning to receive only 20 Series 8 planes in 2024. This is a lot less than the 58 planes that are supposed to be delivered this year according to its contract order book.
Still, the company wants to get rid of about 35 planes—31 series 700s and 4 series 800s.
The stock is down 2% so far this year, while the S&P 500 is up 1%.
SPX 0.35% is up 15%.
