Southwest Airlines announced a three-year plan on Thursday to revitalize its operation and customer offerings as it defends against an activist investor calling for new leadership and a strategy overhaul.
The plan expands on a series of changes by Southwest in recent months, including plans to add premium seats, introduce red-eye flights and replace its pick-your-own seating system with assigned seats, starting in 2026.
The airline said on Thursday that it would begin selling vacation packages and was partnering with international airlines, starting with a connection in Baltimore via Icelandair next year. It also announced a $2.5 billion share repurchase program and plans for operational changes, including speeding up how long it takes to get planes back in the air after they have landed and finding other ways to reduce costs.
Southwest shares were up about 7 percent on Thursday afternoon.
Bob Jordan, Southwest’s chief executive, presented the initiative during a meeting with investors and analysts on Thursday morning, calling it “the most transformational plan” in the airline’s history.
“We’ve laid out a plan that is built on the values and the principles that generated years of financial success and shareholder returns that garnered admiration, loyalty and love,” he said.
The airline is making the moves under rising pressure from an activist hedge fund, Elliott Management, which has amassed a stake of more than 10 percent, worth almost $2 billion. Elliott has said the airline is underperforming and has placed blame on Mr. Jordan, who has worked at the airline for decades.
The hedge fund contends that Southwest can better contain rising costs and improve profit margins. To do that, Elliott says, the airline needs new board members and a new chief executive. The hedge fund plans to call for a shareholder meeting as soon as next week to vote on candidates it has proposed for the airline’s board, mostly former industry executives.
Mr. Jordan on Thursday said that Elliott has refused to work with the airline, focusing instead on “tactics and on gamesmanship.” The airline also said that it had appointed a new board member, Robert Fornaro, the former chief executive of both Spirit Airlines and AirTran, which Southwest acquired more than a decade ago.
Elliott dismissed the plan, saying in a statement that it was not confident Mr. Jordan could effectively implement the new strategy.
“Without credible leadership that can execute, this plan — filled with long-dated promises of better performance — risks becoming the latest in Southwest’s long series of failed improvement initiatives,” the firm said.
Southwest once reported strong profits consistently even as other airlines lost money and sought bankruptcy protection. But its financial results in recent years have disappointed some investors, who point to airlines that have adapted more quickly to shifting demand by, for example, selling more premium seats.
Mr. Jordan has acknowledged that the airline needs to make some changes. The airline is in the middle of rolling out better internet service, in-seat power outlets and larger overhead bins. This year, the airline also began listing its flights on travel websites like Google Flights and Kayak.
But it is not clear whether Southwest, which has become one of the world’s biggest airlines by being different, can now do well by acting a little more like other airlines.
“They don’t need to become another legacy airline,” said Savanthi Syth, a Raymond James Financial analyst. “They just need to adapt, and they need to differentiate themselves.”
In a note about the plan the company put out on Thursday, Ms. Syth said it was promising, but that “execution will be key.” Analysts with the investment firm Jefferies also commended Southwest for taking quick action, but said in a note that some of the airline’s projections seemed optimistic.
Other carriers have spent the past two decades redesigning their planes, fares and policies. Unlike Southwest, many airlines now charge bag fees and offer restrictive basic economy fares to bargain hunters and premium seats to more affluent travelers. Those changes are widely credited with helping airlines make more money.
Southwest made changes, too, such as selling priority boarding, but it sat out much of that industry evolution. Southwest lost a competitive edge in recent years, after other big airlines dropped change fees for many travelers.
Now it’s trying to catch up.
Southwest provided more detail on Thursday about the changes it announced over the summer, which were informed by surveys, interviews and focus groups with customers over the past year.
The airline said that four of every five customers wanted assigned seats, which it will start selling next year for flights in 2026. It has used open seating for decades, allowing it to quickly load planes, but customers have grown frustrated by the experience, Southwest said. Despite switching to assigned seats, the airline will still ask customers to line up by number to board, which it says will save time.
Southwest also said it would start offering red-eye flights in February, adding the equivalent of 18 new planes of capacity over next year. And the airline defended offering two free checked bags to each passenger, saying that a review found that changing that policy would do more harm than good.
The company, which flies almost entirely within the United States, has many things going for it. It still earns consistent if not always stellar profits. It has little debt and the lowest operating costs of any of the four large U.S. airlines. It also consistently earns top ratings from travelers: Southwest ranked highest in customer satisfaction among people flying in economy or basic economy classes, according to a recent J.D. Power report.
But critics say Southwest has failed to capitalize on those strengths and adapt to a changing industry. Its stock is sagging. For most of the past decade, it has delivered the lowest earnings per share of the four large airlines, which include American, Delta and United. Its revenue is growing more slowly than those rivals’, and it has struggled in recent years to keep costs in check, once a defining strength of the business.
In other words, critics say, the once-scrappy airline has grown complacent.
Those problems presented an opportunity to Elliott, which is led by the billionaire investor Paul Singer. In June, Elliott announced its stake in the company and accused Southwest’s executives of letting investors down but said there was time to get the company back on track.
“We are convinced that Southwest represents the most compelling airline turnaround opportunity in the last two decades,” Elliott said at the time in a letter to Southwest’s board. “The significant investment we have made reflects our conviction that, with the right leadership, Southwest can regain its status as an industry-leading airline.”
Elliott said it had based its conclusions on 18 months of research and conversations with more than 130 former Southwest employees and airline industry executives. Once the airline is revamped, the stock could reach $49 a share within a year, a nearly 77 percent return, Elliott said. Southwest’s share price was just over $30 on Thursday morning.
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