Southwest Airlines raises summer revenue forecast, authorizes $2.5 billion in share buyback
DALLAS — Southwest Airlines raised its third-quarter revenue forecast on Thursday, announced its board authorized $2.5 billion in share buybacks and detailed a host of changes to its business model as it seeks to fend off activist Elliott Investment Management.
The airline said it expects unit revenue to rise as much as 3% in the third quarter over the same period last year, up from a previous forecast of a decline of as much as 2%, helped in part by rebooking passengers who were originally flying on airlines affected by July’s CrowdStrike outage.
Southwest shares were up roughly 10% in late morning trading.
The carrier also said it would add Bob Fornaro, a well-respected industry veteran who previously led Spirit Airlines, to its board of directors. Southwest and Fornaro go back more than a decade. He had served as CEO of AirTran, the airline Southwest combined with in 2011, and was a consultant to Southwest after the merger.
Southwest executives are presenting their vision for the company’s future at the airline’s Dallas headquarters on Thursday in an investor day presentation. CEO Bob Jordan and Southwest’s other senior leaders are under increasing pressure from Elliott, which has called for a leadership change at the carrier.
Southwest executives will try to convince investors that it is on the right track to boost profits and increase revenue. Over the summer, it unveiled dramatic changes to its more than half-century-old business model, including assigned and extra-legroom seats, which could generate more revenue for the carrier.
Like with many changes in the airline industry, those new initiatives won’t happen overnight. Seats with extra legroom won’t debut until 2026, as the carrier requires Federal Aviation Administration approval and time to retrofit aircraft, according to a slide from Thursday investor’s presentation. It estimated that the new cabins, in which about a third of the seats will have additional legroom, will generate $1.7 billion in earnings before interest and taxes in 2027.
The new seats will have at least 34 inches of legroom, compared with a standard pitch of 31 inches, the airline said.
Southwest on Thursday also said it is firm on its long-standing policy of allowing customers to check two pieces of luggage for free, saying it “generates market share gains in excess of potential lost revenue from bag fees.”
The airline is facing a shortfall of new aircraft because of delays from Boeing, including a not-yet-certified 737 Max 7, the smallest plane in the family. Without a smaller aircraft, Southwest has cut unprofitable routes that might have been better served by airplanes with fewer seats to meet demand.
“We’ve taken dramatic steps to mitigate the operational risks of risk from future Boeing delays by significantly curbing our growth and arresting our hiring,” Jordan said, adding that all of the airline’s growth through 2026 will come from efficiencies like turning aircraft around faster and red-eye flights.
He said “past financial issues caused by Boeing delivery delays and other Boeing issues have largely been resolved through the application of credits on future deliveries.”
On Wednesday, Southwest told staff it will slash its service in Atlanta next year and could cut more than 300 flight attendants and pilots from the city in an effort to reduce costs.
Earlier this month, Southwest’s executive chairman and former CEO Gary Kelly said he would step down by the end of next year. Elliott later told Southwest mechanics’ union that it still wanted a leadership change at the top of the carrier. The firm didn’t immediately comment on Southwest’s strategy presentation it released Thursday.
— CNBC’s Rohan Goswami contributed to this report.
