Southwest revealed the full details of its plan — called Southwest. Even Better. — to fix itself at investor day last week. Despite the lame name, it does seem like a thoughtful and feasible plan. But what it seems like isn’t really what matters. Southwest has to hit its numbers if its management team wants to stay employed. So now, we wait and watch.
I headed out to Dallas for the investor day along with a couple dozen other media people. Unfortunately, if you listened at home you got the same experience we did. They kept media in a separate room where we just listened to the webcast like everyone else until the execs came in for a Q&A that afternoon followed by a walk over to the hangar to see an aircraft outfitted with the new seats and configuration.
So, what did I take away on a high level? The plan itself seems like it can work, but execution is the hard part. If it does go as planned, this will return Southwest to a respectable level of financial performance by 2027.
That’s not the interesting part, however. What’s interesting is how the airline gets there. There are several components of the plan, so let’s run through them quickly.
- Assigned seating will begin being sold in the second half of next year with a start date of actually flying with assigned seats in the first half of 2026. There will be no slow rollout. One day the whole network is open seating, and the next it’s assigned.
- Extra legroom seating will be fully installed and available at the same time as assigned seating across the fleet.
- The network will be adjusted to improve connection capability, shift flying from Atlanta to Nashville, and reduce Hawaiian flying.
- Interline agreements are finally coming, starting with Icelandair in 2025. Southwest will start by letting Icelandair sell connections on Southwest flights via BWI but it will expand from there. (If this sounds familiar, Southwest dipped its toe in these waters 30 years ago.) Eventually it will expand to include booking via Southwest on other airlines and frequent flier earning and burning.
- Getaways by Southwest will launch as a new internal vacation package product that replaces the outsourced Southwest Vacations with flexible bookings that if canceled, go into a credit that can be used as a normal Southwest credit for flights.
- Productivity will be increased by shortening turn times, flying redeyes, and working on more digital tools so travelers can help themselves.
- Employment will be reduced through attrition but no layoffs. The end of this year should have 2,000 fewer people working for the company than the end of last year.
- On the cost side, Southwest will spend a whole lot less on airplanes over the next few years, dropping those capital expenditures from an expected $2.1 billion per year to $0.5 billion.
- Southwest is also obnoxiously doing a $2.5 billion share buyback program which I hate, but shareholders will like it.
What’s not on here is any change to the bags fly free policy of having two checked bags. Southwest has done what seems to be an exhaustive amount of research — probably too much — and calculates that it would actually hurt the airline to do that with loss of share and brand hit. Considering how much everything else is getting closer to a Big Three airline offering, I don’t disagree with this being important as a standout differentiator.
All of these changes combined with fixing revenue management problems and improving marketing will result in a $4 billion improvement in earnings by 2027.
This is a lot of money. But of course, this is a lot of change. We can try to pick it all apart and test how feasible it is, but there’s no real way to know how much revenue this will generate until it’s put into place. On the surface, the numbers seem somewhat conservative. Ultimately this is what Southwest thinks it can do, and now it has to prove that it can.
Elliott, the activist investor that has been trying to kick out Southwest management, has so far been publicly unimpressed with anything Southwest has done. Southwest CEO Bob Jordan repeated during our Q&A that Elliott has shown no interest in working with management. It’s pretty clear that Elliott has no faith in Bob being able to make anything work, so it has no interest in entertaining any plan that involves him. But Elliott only owns a little over 10 percent of the company so it can’t make that happen alone. It needs other investors to go along.
When you combine all the board changes Southwest has recently announced along with this plan, it does show an airline trying to make large, sweeping changes, especially to governance which has been a broader concern for investors beyond Elliott. If I’m any other investor, I’m pretty happy with the board changes, and I think this plan is doable. I would be willing to give management the runway to make it happen, because any new, big change in management would just throw the airline into chaos and slow down progress.
I don’t expect anyone to wait until 2027 when the plan is complete to see how it turns out, but I do think it’s worth waiting at least until the May annual meeting for the airline. By then, many of these initiatives should have paid dividends, and we should know if the big change to seating is on track to actually start selling in the second half of the year as planned or not. If nothing else, all the work Southwest has done lately should have bought the airline more time with investors not named Elliott.
In short, Southwest has put together a solid plan, but a plan is only half the battle. Now it needs to stick to dates and generate the financial improvements it promises. It’s already off to a good start with revised guidance for Q3 that it issued on investor showing unit revenue for the quarter will now come in up 2 to 3 percent instead of the previous expectation it’ll be flat to down 2 percent.
I’m going to dig in on more of these initiatives over the coming weeks, and we’ll start tomorrow with the biggest change: assigned and extra legroom seating. The airline had an airplane mocked up for us, and it gave a surprising number of details on how and when this will all happen.
