Southwest Airlines turns to assigned and premium seats to lift earnings

By Rajesh Kumar Singh and Shivansh Tiwary

(Reuters) -Southwest Airlines on Thursday announced sweeping changes, including plans to end open seating and offer seats with extra legroom on its airplanes as it faces pressure from an activist investor to improve financial results.

The airline's earnings have been under pressure in recent quarters, partly because of delays in plane deliveries from Boeing, which have hit its revenue and worsened cost pressures. It is also facing pricing pressure as an industry-wide overcapacity in the domestic market has dampened airfares.

The outlook for the September quarter is not upbeat, either. It expects third-quarter unit revenue to be flat to down 2% year-on-year, while non-fuel operating costs are estimated to be up 11%-13%.

TD Cowen analyst Thomas Fitzgerald said Southwest's outlook implies losses in the current quarter and breakeven in the fourth quarter.

Southwest's shares were up about 1.5% at $27.03 in morning trade.

While all U.S. carriers are facing pressure to discount fares due to an excess supply of seats in the domestic market, airlines like Delta and United Airlines are leaning on long-haul international flights and high-margin premium cabins to protect their profit.

Southwest currently doesn't offer these products.

Activist investor Elliott Investment Management is pushing for leadership changes, saying the company needs fresh perspectives to compete in the modern airline industry. It has warned of a proxy fight.

Southwest said its research shows that 80% of its customers, and 86% of potential customers prefer an assigned seat.

It also has plans to offer premium, extended legroom seats, which will account roughly one-third of seats across its fleet.

The company said the new cabin layout will require approvals from the U.S. Federal Aviation Administration and is expected to be available for bookings in 2025.

"We are taking urgent and deliberate steps to mitigate near-term revenue challenges," Southwest CEO Bob Jordan said on Thursday.

U.S. carriers have been reporting strong demand for high-margin premium cabins. Alaska Airlines last week said it would add 1.3 million premium seats annually to its mainline fleet.

Southwest will also start overnight flights in February.

The company plans to share more details at its investor day in September.

Southwest said it was in discussions with Boeing about the negative financial impact it faces from delayed deliveries. It expects compensation in the form of price discounts.

Its second-quarter adjusted profit came in at 58 cents per share, compared with analysts' average estimate of 51 cents per share, according to LSEG data.

(Reporting by Rajesh Kumar Singh in Chicago and Shivansh Tiwary in Bengaluru; Editing by Pooja Desai and Nick Zieminski)