Southwest Airlines to outline strategy to fix profitability problem By Reuters

By Rajesh Kumar Singh

CHICAGO (Reuters) – Southwest Airlines (NYSE: to change its leadership.

The pioneering low-cost airline once boasted a record 47 consecutive years of profit before the COVID-19 pandemic. But delays in plane deliveries from planemaker Boeing (NYSE: ), excess capacity in the domestic airline industry and post-pandemic travel patterns have combined to drag down earnings.

Its passenger volume is below pre-pandemic levels and shares have lost about 40% of their value over the past three years. It has downgraded its outlook at least eight times in the past 20 months, despite rising travel demand, and analysts expect profit in 2024 to fall about 83% from a year ago.

As investors and analysts gather Thursday in Dallas for Southwest’s first public investor meeting of 2022, they want a credible strategy and timeline to restore it to long-term profitability.

The stakes are high. Activist investor Elliott Investment Management has launched a campaign to oust CEO Bob Jordan and replace two-thirds of Southwest’s board, blaming them for the airline’s poor performance. Elliott plans to call for a special meeting of shareholders as soon as next week to force the changes.

While Southwest has made some concessions to the hedge fund, it has repeatedly backed Jordan, calling him “the right leader” to execute a “significant transformation” of its business and improve financial results.

The company must now deliver on this promise.

“It could be dangerous for them if they don’t execute well,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.

Southwest has already shared preliminary details of its overhaul — upgrade to assigned seats and extra legroom to attract premium travelers and begin overnight flights.

It has not yet quantified the increase in revenue from these measures. Analysts and investors are also looking for a more precise timeline for the rollout of the legroom seats, as the new cabin layout requires approvals from the US Federal Aviation Administration (FAA).

The airline is hard pressed for new high-margin revenue streams as its costs have risen and are hurting profits. Operating margin fell to 0.2% in the first half of this year, from more than 13% in 2019.

Before Thursday’s meeting, the company told staff that the airline needed to change its network to account for changes in business travel patterns after the pandemic.

On Wednesday, it cut back on flights to and from Atlanta and told hundreds of workers to relocate.

Analysts say Southwest needs to cut more flights on its network as excess domestic seats squeeze airfares.

An industry-wide overcapacity affected the revenues of all US airlines, but those with more diversified revenue streams such as Alaska Airlines (NYSE: ), Delta Air Lines (NYSE: ) and United Airlines performed better.

THE BOEING PROBLEM

But more importantly, analysts and investors say, the airline needs a solution to Boeing jet delivery delays.

Southwest operates an all-Boeing fleet. It is expected to take delivery of just 20 planes this year, less than a quarter of its original plans because of the planemaker’s safety crisis.

The delays left it overstaffed and forced it to delay the retirement of older, less fuel-efficient planes, driving up operating costs.

Moreover, delays in FAA certification of Boeing’s MAX 7 aircraft — the smallest version of the MAX planes — forced it to operate MAX 8 planes, which have more seats and are too large for some of Southwest’s markets.

Flying larger planes also means more staff. Analysts at Raymond James estimate Southwest’s full-time workforce rose to 92 last year, from 78 in 2018.

“They got a particularly bad set of cards,” said Robert Mann, a former airline executive who now runs a consulting firm. “I’m really in a rock and a hard place.”