By Rajesh Kumar Singh
CHICAGO (Reuters) – Southwest Airlines unveiled several initiatives on Thursday to shore up sagging profits, including partnerships, customer vacation packages and aircraft sales and leasing, but activist investor Elliott Management shrugged off the plan.
Southwest shares rose 7% after the announcement, but are only up about 4% so far this year, a gain that falls well short of Delta Air's 29% and United Airlines' 43% (O :). Elliott reiterated his demand for the ouster of CEO Bob Jordan. The hedge fund also said it remained determined to call for a special shareholder meeting for leadership reform.
Elliott said the airline's plan was “full of long-term promises of improved performance” and called for “credible leadership.” He accused Jordan of “playing with shareholders' money.”
“Another promise of a better tomorrow from the same people who have created the problems we face today,” he said in a statement.
While the airline has offered some concessions to the hedge fund, it has ruled out any leadership change.
At the company's first public investor meeting since 2022 in Dallas on Thursday, Jordan said Southwest doesn't want a proxy fight with Elliott, but the activist investor has shown “little to no interest” in collaborating.
He called the changes announced Thursday “the most transformative plan we've ever had.”
The moves build on earlier plans to switch to assigned seating and more legroom to attract premium travelers and start night flights. The airline, however, will continue its free baggage policy.
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, a 15% return on its invested capital and more than $1 billion in free cash flow. in three years.
Savanthi Syth, an airline analyst at Raymond James, said the 2027 targets were encouraging but the airline must meet them.
On Thursday, Southwest also raised its third-quarter revenue forecast and announced a $2.5 billion share buyback program.
The low-cost airline has been pressured by new sources of high-margin revenue as costs have soared.
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 below pre-pandemic levels and shares have fallen about 40% in recent three years.
It has lowered its outlook at least eight times in the past 20 months despite booming travel demand. Analysts expect earnings in 2024 to fall about 83% from a year earlier.
The airline's poor performance has raised questions about its business model. Jordan recognized that the company needed to evolve and transform. “Our model is not broken, but it needs continuous calibration and improvement,” he said.
NEW INITIATIVES
Before COVID-19 restrictions, Southwest had a record 47 consecutive years of profits. But delays in aircraft delivery by plane maker Boeing (NYSE 🙂 and post-pandemic travel patterns have depressed profits.
To mitigate operational risks, Southwest plans to slow annual capacity growth to 1% to 2% between 2025 and 2027, and minimize hiring.
Southwest said this has reduced its aircraft needs, opening up opportunities to monetize the value of its Boeing 737 fleet. The airline said it is considering selling its planes to leasing companies.
The shortage of new planes has made so-called sale and leaseback transactions a source of income for some airlines. Southwest has orders for nearly 700 new Boeing planes 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 airline next year.
It will also begin selling vacation packages to customers.
Southwest named Robert Fornaro, former CEO of AirTran and Spiritual airlines (NYSE:), to its board of directors.
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