By Rajesh Kumar Singh
CHICAGO (Reuters) -Southwest Airlines on Thursday unveiled a slew of measures to turn around its struggling business, including partnerships, vacation packages for customers and sale-leaseback transactions for aircraft, to boost investor confidence.
The company also boosted its third-quarter revenue forecast and announced a new $2.5 billion share buyback program. Southwest shares were up 6.9% in afternoon trading after earlier gains of more than 10%.
The pioneering low-cost carrier has been hard-pressed for new high-margin revenue streams as its costs have ballooned. Activist investor Elliott Management has been pressuring Southwest to shake up its management.
At the company’s first public investor meeting since 2022 in Dallas on Thursday, CEO Bob Jordan acknowledged that the company needed to evolve and transform. “Our model is not broken but it is in need of continued calibration and enhancement,” he said.
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 running below pre-pandemic levels and shares have slid about 40% in the past three years.
It has downgraded its outlook at least eight times in the past 20 months despite booming travel demand and analysts expect profit in 2024 to plunge about 83% from a year ago.
Questions have been raised about its business model, with Elliott saying the airline was too rigidly committed to a playbook developed decades ago.
Elliott has been campaigning to oust Jordan and replace two-thirds of Southwest’s board of directors, blaming them for the airline’s underperformance. Elliott plans to request a special shareholder meeting as soon as next week.
While Southwest has offered the hedge fund some concessions, it has repeatedly backed Jordan, calling him the “right leader” to execute a “significant transformation” and improve results.
The initiatives announced Thursday augment previous plans to switch to assigned and extra-legroom seats to attract premium travelers, and start overnight flights. The carrier, however, will continue with its bags fly free 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, 15% return on its invested capital and more than $1 billion in free cash flow in three years.
Savanthi Syth, airline analyst at Raymond James, said while Southwest’s 2027 targets are encouraging, the airline must deliver.
It raised its revenue forecast for the third quarter. Revenue per available seat mile is now expected to be up 2%-3% in the September quarter from a year ago, compared with its previous forecast of flat to down 2%.
FLEET MONETIZATION PLAN
Southwest once boasted a record 47 consecutive years of profit before the COVID-19 pandemic. But aircraft delivery delays by planemaker Boeing, excess capacity in the domestic airline industry and post-pandemic travel patterns have depressed earnings.
To mitigate the operational risks, Southwest plans to slow annual capacity growth between 1% and 2% between 2025 and 2027, and minimize hiring.
Southwest said this has reduced its aircraft needs, opening opportunities to monetize the value of its Boeing 737 fleet. The airline said it is considering selling its new planes to leasing companies.
Shortages of new aircraft have made so-called sale-and-leaseback transactions a moneymaker for some airlines. Southwest has nearly 700 new Boeing aircraft on order 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 carrier next year.
It will also start selling vacation packages to customers.
Southwest appointed Robert Fornaro, the former chief executive of AirTran and Spirit Airlines, as a member of its board.
(Reporting by Rajesh Kumar Singh; Editing by Deepa Babington, Chizu Nomiyama and David Gregorio)
Source Agencies
