Southwest Airlines presented a comprehensive transformation plan at its Investors Day, which was held on September 26, 2024.
The announced changes arrive after the airline’s management has been facing serious criticism from major shareholders, which accuse it of underperforming.
In particular, Elliott Investment Management, an activist investor hedge-fund which built a 10% in Southwest stock earlier in 2024, has repeatedly called for Southwest’s CEO, Bob Jordan, to be replaced, as well as other thorough management changes.
In some way, the changes now outlined can be interpreted as a reaction to this situation. They cover several aspects of the passenger experience, to align some of Southwest traditional operational practices with those of its industry peers.
For example, for the first time ever, Southwest is to start assigning seats on its flights. In addition to responding to perceived customer preferences, this move will also allow Southwest to unlock an additional source of ancillary revenue by marketing its different seating types.
Southwest will also enter the holiday package business with the launch of a new service called Getaways by Southwest™, which will bundle the flights together with several different travel leisure services.
The carrier’s frequent flyer program, Rapid Rewards, as well as its associated credit card, will also see some enhancements, partly reflecting the new seat assignment policies too.
However, for now Southwest is to refrain from changing its free checked bags policy. In a statement, the airline said that the downside in terms of reduced demand was expected to outweigh any potential revenue gains.
Southwest is also preparing for some operational changes, such as the introduction of 24-hour operations in some markets and the reduction of aircraft turnaround times. On the day prior to Investors Day, Southwest also announced a retrenchment from Atlanta-Hartsfield international airport (ATL), a move that will be partly compensated for by adding routes on some other markets.
Another first for Southwest is the establishing of a partnership with another airline. Starting in 2025, Icelandair will begin cooperating with Southwest at Baltimore-Washington International Airport (BWI), one of the North American gateways of the Icelandic flag carrier. A second, as-yet undisclosed airline partner should be announced soon.
Overall, with these measures and the optimization of expenditure on new aircraft, Southwest management expects to generate some $500 million in cost savings by the year 2027. The board also approved a $2.5 billion share repurchase.
The ultimate goal is to achieve a return on invested capital (ROIC) of more than 15% by 2027, which, the airline’s management says, will put it well above the weighted average cost of capital (WACC).
The stock market has reacted favorably, with share prices going up by as much as 11.4% on the same day. Nevertheless, Elliott Investment Management, the main critic of Southwest’s current management team, appeared unimpressed by these announcements.
The investment firm reiterated its disappointment with the way the airline is being managed and its opinion that the current managerial team is leading the company along a path of continued underperformance.
“Another promise of a better tomorrow from the same people who have created the problems we face today. Without credible leadership that can execute, this plan – filled with long-dated promises of better performance – risks becoming the latest in Southwest’s long series of failed improvement initiatives.” read the statement made public by Elliott Investment Management shortly after Southwest’s Investors Day.
Elliott renewed calls to replace the current management team and requested a special shareholders’ meeting to discuss this matter.