Southwest Airlines Finally Introduces Assigned Seating After 50 Years

Summary

• Under pressure from external parties and its own financial underperformance, Southwest Airlines has introduced assigned seating and premium seat options.
• The new cabins, pending the approval of the Federal Aviation Administration (FAA), should be available in 2025.
• In Q2 2024, Southwest Airlines earned a net income of $367 million.

Under pressure from an activist investor and admitting that the airline has underperformed financially, Southwest Airlines executives have made monumental changes to its onboard experience, introducing assigned seating while also offering premium seat options for its customers.

Meeting customer demand and increasing revenues

The changes will be coming on all flights. While Southwest Airlines has been known for its unique open seating model for over 50 years, it says passenger preferences have evolved, including passengers taking longer flights. As a result, seat assignment was preferred to ensure additional comfort.

“The research is clear and indicates that 80% of Southwest Customers, and 86% of potential Customers, prefer an assigned seat. When a Customer elects to stop flying with Southwest and chooses a competitor, open seating is cited as the number one reason for the change.”

In addition to assigned seats, customers will also have access to premium seating options. These will offer extended legroom, which many customers prefer, according to the carrier.

The airline stated that one-third of its seats would offer extra legroom, comparable to what its competitors have offered passengers.

However, Southwest Airlines warned that the new cabin layout will require the Federal Aviation Administration’s (FAA) approval in addition to incorporating new technologies and procedures for a seamless transition. The carrier said bookings should become available in 2025.

Furthermore, Southwest Airlines will introduce red-eye flights, which will begin operating in February 2025. The flights will be available on routes from Los Angeles International Airport (LAX) to Baltimore/Washington International Thurgood Marshall Airport (BWI), from Las Vegas Harry Reid International Airport (LAS) to BWI, from LAS to Orlando International Airport (MCO), from Phoenix Sky Harbor International Airport (PHX) to BWI, and from LAX to Nashville International Airport (BNA).

Pressure from Elliot Investment Management

When the airline announced its Q1 2024 results, Bob Jordan, the president and chief executive officer (CEO) of Southwest Airlines, admitted that he was disappointed in its Q1 performance.

Still, Jordan added that efforts and progress were underway to ensure that the carrier delivers the returns shareholders expected from Southwest Airlines.

Jordan’s remarks came despite Southwest Airlines earning record-breaking Q1 revenues. The company ended the three-month period with operating revenues of $6.3 billion, which was still shy of its aspirations.

“Separately, we are considering more transformational options and follow-on initiatives. That includes work previously underway to study customer preference around seating and our cabin.”

Now, the CEO stated that the new cabin experience will be a transformational change that cuts across almost all aspects of the company. While the open seating model has been part of the airline’s identity since its inception, research showed that it was the right choice at the right time, Jordan said.

“We have been building purposefully to this change as part of a comprehensive upgrade to the Southwest experience as we focus on Customer expectations – and it will unlock new sources of revenue consistent with our laser focus on delivering improved financial performance.”

Elliot Investment Management has pressured Jordan and the rest of the board of directors. The investment company had built a significant shareholding in the airline, and the board responded by setting up a poison pill that would dilute Elliot Investment Management’s shareholding if it attempted to increase its stake in Southwest Airlines.

Must-have changes

However, Southwest Airlines, Elliot Investment Management, and executives from the Southwest Airlines Pilot Association (SWAPA) have all admitted that changes were needed at the airline, as it has been struggling financially.

In particular, the investment firm has blasted the airline’s executives and board for many things, including the fact that Southwest Airlines issued eight guidance reductions in the past 18 months.

Elliot Investment Management called for a complete leadership change at the carrier with the plan ‘Stronger Southwest.’ When the airline announced the addition of Rakesh Gangwal, an experienced airline executive with prior C-level roles at US Airways, Air France, and United Airlines and the co-founder of IndiGo, the firm said that Gangwal would be “supportive of Southwest’s current leadership and status-quo approach […].”

On July 8, Elliot Investment Management continued pressuring the airline, publishing an open letter saying the feedback it had received was consistent with its perspective. The letter once again reiterated that leadership changes were a must at Southwest Airlines.

Return to profitability

Nevertheless, the airline’s announcement about the changes to its seating policy coincided with the publication of its Q2 results, with Southwest Airlines returning to profitability after a net loss of $231 million in Q1.

In Q2, the airline’s revenues were $7.4 billion, resulting in a net income of $367 million, with revenues growing 4.5% year-on-year (YoY). According to Southwest Airlines, this was another all-time quarterly record.

Commenting on the quarterly results, Jordan said that they were impacted by external and internal factors and fell short of what the company believed it was capable of delivering.

“Our goal is to restore industry-leading margins and historical levels of Shareholder returns through our comprehensive plan to deliver transformational commercial initiatives, improved operational efficiency, and capital allocation discipline.”

Looking forward, Southwest Airlines said that its revenue per available seat mile (RASM), available seat miles (ASM), and cost per ASM (excluding fuel) would be flat to down 2%, up around 2%, and up 11% to 13%, respectively, in Q3.

Its 2024 guidance, which includes ASMs growing by 4%, an operational fleet of 802 aircraft, and other metrics, has remained unchanged.