(Bloomberg) -- Southwest Airlines Co.’s shares surged the most in almost four years after the carrier unveiled a stock buyback plan and detailed major policy changes, part of a plan to revitalize its operations and fend off an activist investor.
The airline will begin selling assigned seats late next year and introduce a premium fare option offering extra leg room, according to a statement Thursday. The changes break from tenets that helped set Southwest apart for decades, after the carrier was slow to embrace the industry’s push to capture growing demand for premium flying options.
Other Southwest hallmarks will endure, however. The carrier said it has no plans to introduce fees on checked luggage, sticking with the “bags fly free” policy that executives believe keeps customers loyal.
The disclosures were part of a wide-ranging investor update as Southwest also set a new $2.5 billion share repurchase program, raised its third-quarter sales forecast and said it added former airline executive Robert Fornaro to its board.
Southwest’s shares rose 7.3% as of 3:10 p.m. in New York after an earlier jump of 11%, the biggest intraday gain since November 2020. Rival carriers also saw gains, with American Airlines Group Inc., Delta Air Lines Inc. and United Airlines Holdings Inc. each rising 6% or more.
The presentation offered new details about Southwest’s plan to turn around lagging financial results and update its long-standing, one-size-fits-all business model to appeal to today’s consumers. The airline aims to convince shareholders that its efforts are working and there’s no need for activist Elliott Investment Management’s aggressive plan to shake up the company.
“Although it is hard to predict exactly how many shares the carrier could repurchase and when, the overall guide looks positive, and suggests that today’s management team remains in the driver’s seat,” Stephen Trent, a Citigroup Inc. analyst, said in a note.
Elliott on Thursday said it remained determined to call a special shareholder meeting so investors can vote on its slate of 10 new directors to overhaul Southwest’s board. It also reiterated its demand to remove Bob Jordan as chief executive officer, saying he “lacks the vision and capability to execute” on the company’s changes, which the activist had previously called “reckless and chaotic.”
The steps detailed by Southwest Thursday have been “in the works for a long period of time,” Jordan said during the company’s investor presentation. “For Elliott to call that plan rushed and haphazard, in my opinion, is inane,” he said.
Southwest already had announced a number of significant changes, including adding redeye flights and the move to assigned seats, ditching the free-for-all policy of more than 50 years. Chairman Gary Kelly plans to retire in 2025, and another six directors will step down this year.
The new initiatives, along with additional steps underway to increase efficiency and lower costs by $500 million, should contribute to an extra $4 billion in earnings before interest and taxes by 2027, the carrier said.
“I am accountable to the plan,” Jordan said. “I am accountable for delivering against the targets we are communicating today.”
The airline on Thursday laid out the case for keeping its policy of two free checked bags — the only US carrier with such an offer — despite its recent customer surveys exploring possible changes. Southwest said it would lose about $300 million a year by eliminating the policy, with lost market share outpacing the $1.5 billion in revenue potential from bag fees.
Extra Leg Room
An average of 30% of seats across its fleet will have added leg room of 3 to 5 inches. The carrier didn’t provide details on planned fees for preferred seats in the front of its planes, but said it would largely maintain its current boarding process. Available seating and boarding options will increase as travelers select higher fare categories.
“There is an absolute need for us to evolve our model to better meet customer preferences,” said Ryan Green, executive vice president for commercial transformation.
Routes with assigned seating will go on sale in the second half of next year, with the first flights operating in early 2026.
The airline maintained its order book totaling 694 new aircraft from Boeing Co. through 2031, but said it would consider opportunities to sell excess aircraft and, in some case, to sell planes to aircraft lessors and then lease them back.
For the first time, Southwest will partner with other airlines starting early next year with Icelandair, initially giving its customers access to flights across the Atlantic, with eventual plans to sell seats on those carriers through Southwest channels. It will also add the ability to book vacations on its website starting in mid-2025.
Southwest also updated its outlook for this quarter, saying revenue for each seat flown a mile will increase as much as 3%, compared with an earlier outlook for it to fall as much as 2%. Flying capacity will increase about 2% over 2023 and non-fuel unit costs will increase as much as 13%, both consistent with an earlier forecast.
The company intends to expand flying plans by 1% to 2% in each of the next three years, Southwest said, and international growth has been put on hold for now. The company also expects to have as many or fewer employees in 2027 than it does today.
Initiatives to boost efficiency and minimize hiring should produce annual run-rate savings of at least $500 million by 2027, Southwest said.
Unprofitable Routes
The latest announcements come a day after Southwest took steps to eliminate unprofitable routes, saying it would cut roughly a third of its flights through Atlanta, the world’s busiest airport. While Southwest doesn’t plan involuntary layoffs, the move is expected to lead to more than 300 pilot and flight attendant job reductions — drawing a harsh rebuke from union officials.
“We are outraged,” Bill Bernal, president of the Transport Workers Union local representing flight attendants, said in a message to its members. “Promises were broken and now the lives of flight attendants and their families are severely impacted.”
While Southwest plans to add redeye flights from Hawaii to the mainland US, the airline is also trimming inter-island Hawaii flying by 20%. It plans to increase service in Nashville.
Southwest has struggled this year with slowing growth, fewer-than-expected aircraft deliveries from Boeing, rising labor costs and a series of flight-safety incidents that triggered a Federal Aviation Administration review. The airline’s stock has fallen slightly this year through Wednesday, lagging far behind the 20% gain in the S&P 500 Index.
That has made the carrier vulnerable to attacks from Elliott, which disclosed its stake in June and has become Southwest’s second-largest investor. The activist has taken aim at both Jordan and Kelly for poor execution and a “stubborn unwillingness to evolve the company’s strategy.”
(Updates shares in fifth paragraph, adds Elliott comment in the eighth paragraph.)
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