Southwest Airlines, the original low-cost carrier, announced a significant change of its business model on Thursday, dubbed “Southwest 2.0.”
The airline revealed plans to introduce assigned seating, charge for extra legroom, and offer red-eye flights for the first time in the company’s history.
CEO Robert Jordan presented the new strategy at a meeting with investors at the airline’s Dallas headquarters, emphasizing that while their model “is not broken,” it needs enhancement to address declining financial performance.
Southwest’s annual profit is on track to decline for the third consecutive year, and its stock price has fallen by more than half since early 2021.
The most notable change is the introduction of assigned seating, departing from Southwest’s long-standing open seating policy. Passengers will now have the option to select their seats, with the airline also offering extra-legroom seats for an additional fee. Southwest will also introduce red-eye flights, expanding its schedule offerings to include overnight travel options.
To make its credit cards and frequent-flyer program more attractive, Southwest plans to forge international partnerships, starting with Icelandair next year. The airline will also revamp its fare structure, offering four tiers with increasing perks at higher price points.
Despite these changes, Southwest will maintain its popular “bags fly free” policy. The airline estimates that introducing bag fees could result in a net loss of $300 million annually due to potential customer attrition.
Jordan projects that these changes will add approximately $1.5 billion in pretax earnings by 2027. However, he acknowledged the complexity of implementing such significant changes, particularly in updating the airline’s numerous systems currently geared towards open seating.
This overhaul comes amid pressure from activist investor Elliott Investment Management, which has criticized Southwest’s management and financial performance. Elliott, the airline’s second-largest shareholder, dismissed the turnaround plan as inadequate and plans to call for a shareholder meeting to potentially vote on new board directors.
In response to investor pressure, Southwest has already announced changes to its board composition, including the departure of six directors in November and Chairman Gary Kelly stepping down next year.
The airline also announced a $2.5 billion share-buyback program designed to make existing shares more valuable, and reported that third-quarter revenue will be better than expected, partly due to gaining passengers stranded by other airlines during the July CrowdStrike global tech outage.