Southwest's turnaround strategy lifts shares, activist investor Elliott shrugs
Southwest struggling to restore profit margins
Activist investor wants to overhaul Southwest leadership
New plans could add $4 bln in earnings by 2027, company says
Third-quarter revenue forecast increased, boosting shares
Updates shares to close
By Rajesh Kumar Singh
CHICAGO, Sept 26 (Reuters) -Southwest Airlines LUV.N on Thursday unveiled several initiatives to shore up sagging profits, including partnerships, vacation packages for customers and aircraft sale-leasebacks, but activist investor Elliott Management shrugged off the plan.
Southwest shares rose 5.4% afterthe announcement but are only up about 4% year to date, a gain that is far shy of 29% for Delta Air DAL.N and 43% for United Airlines <UAL.O>.Elliott reiterated its demand for CEO Bob Jordan's ouster. The hedge fund also said it remained determined to request a special shareholder meeting for the leadership overhaul.
Elliott said the airline's plan was "filled with long-dated promises of better performance," and called for "credible leadership". It accused Jordan of "playing with shareholders' money."
"Another promise of a better tomorrow from the same people who have created the problems we face today," it said in a statement.
While the airline has offered the hedge fund some concessions, it has ruled out any leadership change.
At the company's first public investor meeting since 2022 in Dallas on Thursday, Jordan said Southwest does not want a proxy fight with Elliott, but the activist investor has shown "little or no interest" in collaborating.
He called the changes announced on Thursday, "the most transformational plan we have ever had."
The initiatives augment previous plans to switch to assigned and extra-legroom seats to attract premium travelers, and start overnight flights. The carrier, however, will continue with its bags fly free policy.
Southwest said these measures would contribute about $4 billion in incremental earnings before interest and taxes (EBIT) by 2027. It expects to produce at least a 10% operating margin, 15% return on its invested capital and more than $1 billion in free cash flow in three years.
Savanthi Syth, airline analyst at Raymond James, said the 2027 targets were encouraging but the airline must deliver.
On Thursday,Southwest also boosted its third-quarter revenue forecast and announced a $2.5 billion share buyback program.
The low-cost carrier has been hard-pressed for new high-margin revenue streams as costs have ballooned.
The company's operating margin fell to 0.2% in the first half of this year from more than 13% in 2019, passenger volumes are running below pre-pandemic levels and shares have slid about 40% in the past three years.
It has downgraded its outlook at least eight times in the past 20 months despite booming travel demand. Analysts expect profit in 2024 to plunge about 83% from a year ago.
The airline's underperformance has raised questionsabout its business model. Jordan acknowledged the company needed to evolve and transform. "Our model is not broken but it is in need of continued calibration and enhancement," he said.
NEW INITIATIVES
Before COVID-19 restrictions, Southwest boasted a record 47 consecutive years of profit. But aircraft delivery delays by planemaker Boeing BA.N and post-pandemic travel patterns have depressed earnings.
To mitigate the operational risks, Southwest plans to slow annual capacity growth between 1% and 2% between 2025 and 2027, and minimize hiring.
Southwest said this has reduced its aircraft needs, opening opportunities to monetize the value of its Boeing 737 fleet. The airline said it is considering selling its planes to leasing companies.
Shortages of new aircraft have made so-called sale-and-leaseback transactions a moneymaker for some airlines.Southwest has nearly 700 new Boeing aircraft on order through 2031.
The company said it will launch a partnership with Icelandair in early 2025 for transatlantic connectivity. It plans to add at least one additional partner carrier next year.
It will also start selling vacation packages to customers.
Southwest appointed Robert Fornaro, former chief executive of AirTran and Spirit Airlines, to its board.
Reporting by Rajesh Kumar Singh; Additional reporting by Nathan Gomes in Bengaluru; Editing by Deepa Babington, Chizu Nomiyama and David Gregorio
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