For the first time in its history, Southwest will assign seats.
Southwest Airlines
For the first time in its half century of operations, Southwest Airlines is ditching its open seating and shifting to assigned seats, the company announced ahead of a quarterly earnings call Thursday.
“The airline has been known for its unique open seating model for more than 50 years, but preferences have evolved with more customers taking longer flights where a seat assignment is preferred,” Southwest said. “The research is clear and indicates that 80% of Southwest customers, and 86% of potential customers, prefer an assigned seat.”
Southwest will also turn roughly a third of seats into premium, extended legroom seats “that research shows many customers strongly prefer,” the company said. This product is “in line with that offered by industry peers on narrow-body aircraft.”
The airline will also start offering overnight “red-eye” flights for the first time, which it said will improve provide incremental revenue and cost savings, giving Southwest new capacity without incremental aircraft capital deployment.
Southwest customers may take solace in that there was no mention of any change to Southwest’s biggest perk and most popular differentiator. The airline is an outlier for letting passengers fly with two free checked bags, while other U.S. carriers charge anywhere from $15 to $40 for the first checked bag and between $40 and $60 for a second bag.
“Moving to assigned seating and offering premium legroom options will be a transformational change that cuts across almost all aspects of the Company,” said Southwest CEO Bob Jordan. “Although our unique open seating model has been a part of Southwest Airlines since our inception, our thoughtful and extensive research makes it clear this is the right choice—at the right time—for our customers, our people, and our shareholders.”
That last word is key. For the past six weeks, the airline has been under pressure by Elliott Investment Management, a firm owned by Paul Singer, “Wall Street’s most feared activist investor,” which took a $1.9 billion stake in the airline, representing a roughly 11% interest in the company. While far from a majority, it is enough to give Singer’s firm a big voice as one of the airline’s largest single shareholders.
In a 51-page presentation to the board called “Stronger Southwest,” Elliott sketched out a plan to generate big returns for shareholders: “We believe Southwest’s stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period.” Part of the presentation outlined the ways Southwest was an outlier in the industry for not monetizing through products like premium seating and baggage fees. Elliott has also called for the ousting of Jordan and Gary Kelly, the company’s chairman and former CEO.
Earlier this month, Southwest adopted a shareholder rights plan known as a “poison pill,” allowing existing shareholders to buy shares at a 50% discount if any shareholder acquires 12.5% or more of its common stock.
“We are taking urgent and deliberate steps to mitigate near-term revenue challenges and implement longer-term transformational initiatives that are designed to drive meaningful top and bottom-line growth,” said Jordan ahead of its second-quarter earnings call. Southwest Airlines is reporting operating revenues of $7.4 billion and net income of $367 million.
“Our second quarter performance was impacted by both external and internal factors and fell short of what we believe we are capable of delivering,” said Jordan, noting that shareholders “have provided us with highly valuable and candid feedback on our performance and path forward.”
Before the markets opened Thursday, Southwest shares were trading at $26.61. Shares of the company are down about 25% in the past year, while the benchmark S&P passenger airline index is down roughly 19% over the same time.