DALLAS -- Southwest Airlines has a plan that it says will produce $4 billion in incremental revenue and an operating margin of 10% by 2027.
But in order to deliver on the strategy, CEO Bob Jordan and the current board of directors will have to emerge victorious over Elliott Investment Management, the activist shareholder that plans to press forward with a proxy battle aimed at reshaping company leadership.
The airline's leadership used its Sept. 26 Investor Day to detail the strategy to reinvigorate Southwest and return profit margins to their historical place near the top of the industry, to which the airline's first extra-legroom seats and its move to assigned seating are central.
Other key initiatives are the launch of airline partnerships, starting with Icelandair next year, and the introduction of a reformulated vacation-package brand in mid-2025, to be run in-house.
The airline has also detailed plans to improve its cost metrics, including increased fleet utilization through the launch of red-eye flights next February and a series of steps geared toward reducing aircraft turn times.
Customers will begin noticing Southwest planes reconfigured with extra-legroom seats as soon as the first quarter of 2025. But those seats will only be sold as a separate product beginning in the first half of 2026. In the interim, flyers with early boarding will get the first shot at an extra-legroom seat.
That timeline provided fodder for Elliott to offer renewed criticism of Jordan in a statement put out during Investor Day: "Today's announcement that adding assigned seating and premium products will take multiple years to implement -- when peers have implemented similar changes in much shorter time frames -- is further evidence that Mr. Jordan lacks the vision and capability to execute on these initiatives."
Elliott, which owns 11% of Southwest stock and has already announced its own slate of 10 proposed board members, planned to formally call for a proxy vote as soon as this week. If the firm moves ahead, the vote would be set before Southwest's annual meeting in May.
Anticipating an Elliott rebuke, Jordan offered his own choice comments during Investor Day.
"We refuse to let anything distract us from running a safe and reliable operation, and I refuse to let Elliott distract from executing our plan, which I believe will create substantial value for Southwest and our shareholders," he said.
Southwest expects to begin aircraft retrofits at a rate of 50 to 100 aircraft per month, potentially while management and Elliott are separately lobbying to line up shareholder support ahead of such a proxy vote. Retrofitting is slated for completion by the end of next year.
The extra-legroom seats will offer 34 inches of space between rows. To make room, Southwest plans to reduce the space between rows on its larger aircraft, the 737-8, by one inch for standard seats. That will leave those seats with a spacing of 31 inches, which is what Southwest's 737-7 planes have.
Fleetwide, Southwest plans to provide extra legroom for approximately 30% of its seats, with extra-legroom rows split between a section at the front of aircraft and another in and behind the exit rows.
Ryan Green, Southwest's executive vice president of transformation, said technological updates are the primary impediment to selling an extra-legroom product before all aircraft are retrofitted. The airline must update more than 60 platforms as it transitions from open seating to assigned, he said. And attempting to sell assigned seats on some planes, while doing open seating on others, would increase the chance of a screw-up.
Getaways by Southwest
Southwest will call its in-house vacations packages brand Getaways by Southwest, replacing the Southwest Vacations brand, whose operations are outsourced to Apple Leisure Group.
Thus far, the company isn't saying whether travel advisors will be able to sell and receive commissions on Getaways trips, as they can with Southwest Vacations. But the packages will be sold directly within the Southwest website and other Southwest channels, a change from the current indirect model.
Green said that Getaways will offer various consumer benefits not available with Southwest Vacations. Among them, customers will be able to purchase packages with Rapid Rewards loyalty points. On cancellations, customers will still be able to use the travel credit for a different vacation if they choose. But they'll also have the option of applying the credits for flight-only trips.
Also in leisure travel, Southwest Airlines has begun selling cruises at SouthwestCruises.com.
Southwest plans to launch the Icelandair partnership next year out of Baltimore before expanding to other U.S. cities. Initially, Icelandair will sell ticket segments on Southwest. Southwest won't begin selling Icelandair segments in its booking channels until it makes the move to assigned seating.
Investment analysts generally reacted positively to the Southwest plan, though Elliott could throw a wrench in the gears.
"While we are of the view that various elements of the transformation plan are reasonably achievable," wrote Deutsche Bank analyst Michael Linenberg, "the debate among the investment community is whether the management team can execute a transformation plan that ultimately yields $4 of [earnings per share] by 2027 while being scrutinized by an activist investor."