By Rajesh Kumar Singh

CHICAGO (Reuters) – Southwest Airlines Faces Investor Pressure

Southwest Airlines (NYSE:LUV), a leading low-cost carrier, is under pressure from an activist investor seeking to reform what they deem an outdated business model. This situation has placed CEO Robert Jordan in a challenging position as the airline strives to modernize, according to analysts.

Investor Day Ahead

With an investor day scheduled for Thursday, Jordan is expected to reveal plans aimed at restoring the carrier’s long-term profitability—a standard that investors expected before the pandemic.

Proposed Changes

Potential changes include introducing assigned seating and extra-legroom seating—higher-margin offerings that competitors like Delta and United Airlines adopted years ago.

Shift in Business Travel Patterns

Prior to the investor meeting, COO Andrew Watterson communicated to staff via video that the airline’s network needs adjustment to reflect changes in business travel patterns post-pandemic. He emphasized that larger changes would be made for some cities, but the airline doesn’t plan to cease serving them.

“It’s a delicate balancing act, and it requires difficult decisions,” Watterson stated.

In light of this, Southwest announced service cuts in Atlanta for the following year.

Activist Investor Campaign

Concerns have been raised by analysts and investors, particularly hedge fund Elliott Investment Management, regarding the airline’s rigid adherence to an outdated strategy. Elliott has started efforts to replace Jordan and top executives.

Elliott plans to convene a special meeting of shareholders soon to pursue leadership changes, but the airline has ruled out any leadership adjustments, asserting it is undergoing a major transformation to enhance financial performance.

Historical Profitability and Overconfidence

Southwest once enjoyed 47 consecutive years of profit prior to the pandemic but is struggling to maintain profitability now. Insights from analysts suggest that the airline’s previous success may have resulted in overconfidence and inflexibility among its leaders.

Rob Britton, a professor at Georgetown University, noted, “They have been far too ingrown and … far too smitten with ‘we’ve got to do it the Southwest way.'”

In response, a Southwest spokesperson emphasized that decisions are data-driven and the company approaches market issues and its business model with deliberate planning.

Strategic Missteps

A miscalculation occurred when Southwest opted to expand into 18 new markets during the pandemic, a strategy that typically aids market share during downturns. However, pandemic aid altered the operational landscape, with expansions negatively impacting margins.

Analysts criticized the airline’s tardy response to increased demand for premium travel, an area yielding higher profit margins. Initially dismissed as “highly cyclical,” Southwest later acknowledged this shift by planning to attract premium customers through assigned and extra-legroom seating.

Henry Harteveldt, founder of Atmosphere Research Group, remarked, “Southwest is an example of complacency at work and all the risks that brings to business.”

Technology Adoption Delays

Slow technology adoption has also drawn criticism. For instance, Southwest only introduced SkyPath software, which assists pilots with turbulence navigation, this year—while competitors have used it for years. The airline claimed that integrating the software and training pilots took time.

Jordan stated on a recent podcast that the airline is investing heavily in technology, attributing a smoother experience in July to these innovations amid a global cyber outage that affected many airlines.

Financial Challenges

Before the pandemic, Southwest’s stringent cost management fueled its success, but operating expenses have risen sharply, consuming 99% of revenue last year, up from approximately 80% in 2015. The airline’s dependence on Boeing has also incurred major costs due to production and regulatory issues, forcing the airline to operate unplanned aircraft.

Analyst Brett Snyder contends that Southwest’s troubles reflect inadequate future planning during its profitable periods. This foresight deficiency has limited the airline’s revenue diversification and left it exposed to declining domestic fares.

Unlike European counterpart Ryanair, Southwest’s flights were unavailable for booking on third-party platforms until recently and continue to be sold only in U.S. dollars, limiting international customer outreach.

Snyder pointed out that the airline must identify new growth opportunities beyond its current fleet and network: “The airline was going to run out of traditional growth opportunities with its existing fleet and network. One of the failings was to really look more forward as opposed to living in the present.”