Southwest Airlines is preparing to unveil a strategy to turn around the business and restore profit margins back to pre-pandemic levels on Thursday, as it faces pressure from a activist investor to shake its management.
Before the COVID-19 epidemic, the pioneering low-cost carrier had a record 47 consecutive profit years. Boeing’s aircraft delivery delays, excess capacity of the domestic airline sector and post-pandemic patterns of travel have all combined to lower earnings.
Its passenger volume is below the pre-pandemic level and its shares are down about 40% in value over the last three years. It has downgraded the outlook at least eight time in the past twenty months despite booming travel demands. Analysts expect profit to plummet about 83 percent from a few years ago in 2024.
Investors and analysts will gather in Dallas, Texas on Thursday to attend Southwest’s first investor meeting since 2022. They want a credible timeline and strategy for restoring the airline’s long-term profitability.
The stakes have never been higher. Elliott Investment Management is an activist investor that has launched a bid to remove Southwest Airlines CEO Bob Jordan, and replace two thirds of the board. It blames them for Southwest Airlines’ underperformance. Elliott will request a shareholder meeting to force changes as soon as next Monday.
Southwest has made concessions to the hedge-fund, but it has consistently backed Jordan. They have called him “the right leader” who can execute a “significant transform” of their business and improve its financial results. The company has to now deliver on its promise.
Brian Mulberry said that if the company does not perform well, it could be dangerous for them. Southwest has already released preliminary details about its overhaul. It will switch to extra-legroom seats and assign them to premium travelers. It will also start overnight flights.
Boeing, which has faced supply chain issues, delivered 69 planes to Southwest in 2022, down 45 jets from the 114 the company planned to deliver, Southwest Airlines Chief Executive Bob Jordan said, adding Boeing has agreed to boost deliveries this year. Boeing has not delivered 388 737 MAXs to Southwest Airlines, of which 271 are MAX 7s.
It has not quantified the revenue boost that these measures will bring. Analysts and investors also want to know a more precise timetable for the rollout of seats with extra leg room, since the new cabin layout needs approval from the US Federal Aviation Administration. The airline is struggling to find new revenue streams with high margins as its costs are increasing and affecting profits. Its operating profit margin fell to 0.2 percent in the first six months of this year, down from over 13 per cent last year. The company informed its staff ahead of the meeting on Thursday that it needed to adjust its network in order to accommodate the shifts in business travel patterns following the pandemic. On Wednesday, the airline cut its flights to Atlanta and asked hundreds to relocate. Analysts believe Southwest should cut more flights from its network, as a glut of seats in the domestic marketplace is lowering airfares.
The industry’s overcapacity is affecting all US airlines. However, those with more diverse revenue streams like Alaska Air, Delta Air Lines, and United Airlines are performing better. Analysts and investors agree that the airline must find a solution for Boeing’s delays in delivering aircraft.
Southwest operates a Boeing-only fleet. Due to the safety crisis at Boeing, Southwest expects to receive only 20 planes in this year. This is less than one-fourth its original plan. The delays have caused it to be overstaffed, and forced it defer the retirement older and less fuel efficient jets. This has driven up its operating cost.
Southwest has also been forced to use MAX 8 aircraft because of delays in FAA certification for Boeing’s MAX 7 aircraft, the smallest version. MAX 8 planes have more seats, but are too large for some of Southwest’s markets. Flying larger planes also requires more staff. Southwest’s full time employees per aircraft grew to 92 from 78 last year, according to Raymond James analysts.
Robert Mann, former airline executive and now consultant, said that the company had been dealt a bad set of cards.
“They are really stuck between a rock and hard place.”
