Southwest is under pressure to make big changes to its planes, flights, and bag rules: Here's what they could all look like

Southwest is under pressure to make big changes to its planes, flights, and bag rules: Here's what they could all look like
  • An activist investor has bought a big stake in Southwest Airlines and is asking for major changes.

  • Elliott Management wants a new CEO and a total review of Southwest's business model.

  • The hedge fund wants to fix outdated systems and has suggested more add-on fees to increase revenue.

Activist firm Elliott Investment Management has taken a $1.9 billion stake in Southwest Airlines and has proposed big changes — including a new CEO — to shore up the company's stock price and fix what it's called mismanagement.

Many of the changes are behind the scenes, like a board shake-up and new C-suite talent, but others (if enacted) could affect Southwest's quirky customer-facing features that make it a unique carrier in an industry that increasingly looks the same these days.

In some cases, Southwest is already considering changes or has been rumored to for years. Other changes would be brand new for the 57-year-old airline.

"We are convinced that Southwest represents the most compelling airline turnaround opportunity in the last two decades," Elliott said in its letter to Southwest's management on June 10.

Southwest new seat ith tablet holder and power.
Southwest is introducing new economy seats next year, adding tablet holders and power. However, the seats' slim appearance has received backlash.Southwest Airlines

Elliott has pointed to possible revenue opportunities for items like bags and seats, while experts told Business Insider that changes to Southwest's network and systems could give customers more choice.

"They want the airline to start acting like every other airline, like charging for checked bags, introducing basic economy, creating an extra legroom coach seat, and more," Henry Harteveldt, a travel analyst and president of Atmosphere Research Group, said.

Southwest could charge for bags — one of its biggest free perks

Elliott's proposal called attention to one of Southwest's most visible perks: two free checked bags. The proposal suggested unbundling the fare and charging for bags could generate more revenue.

However, Richard Aboulafia, managing director of aerospace consulting firm AeroDynamic Advisory, told BI that Southwest and its customers may resist the idea as the perk boosts loyalty.

Southwest CEO Robert Jordan said at a Politico event in June that 50% of the company's consumer base chooses Southwest because of the free checked bag policy, Reuters reported. CCO Ryan Green told CNBC in April the change was not on the table.

Southwest passenger checking in.
Southwest's stock price has struggled since the pandemic started. Elliott Investment Management says its proposed changes could push shares 77% higher.Scott Olson/Getty Images

There is a way for both sides to win, according to Harteveldt: Give free checked bags to Southwest credit card holders.

American, Delta, and United offer complimentary checked bags as credit card perks. Southwest could capitalize on the same strategy with its co-branded Chase cards.

Baggage fees were worth an estimated $33.3 billion to global airlines in 2023, according to a report from IdeaWorksCompany, a consultancy for airline ancillary revenues.

The airline was already thinking about changing open seating

Southwest has for months been discussing changes to its seating policy as a way to boost revenue, but Green told CNBC that adding another cabin to the aircraft — à la business class or premium economy —is unlikely.

Elliott suggested seat assignments could be a lucrative revenue stream. Southwest already earns ancillary revenue for early boarding — and it recently increased the price for that perk.

Business travelers, for example, may be willing to pay for a specific seat. And even leisure travelers, like those with families, "don't want to play boarding bingo," Harteveldt said.

Southwest Airlines.
Southwest flies an all-Boeing 737 fleet with only economy seats. These are first-come, first-served, and the boarding order is based on check-in time. You can pay extra for early boarding.Thomas Pallini/Insider

Mainline carriers like American, Delta, and United have found much success in their discounted "basic economy" fares, which offer a cheaper base fare but charge for seats — and they can make a lot of money selling premium seats in exit rows and closer to the front for an extra fee.

Southwest was slow to consider red-eye flights

Southwest is planning to add red-eye flights starting in 2026, launching from hot-spot destinations like Las Vegas and Hawaii, Green said at a conference in March.

The additional flights can give travelers more flexibility and give Southwest more seats to sell on a route.

According to The Seattle Times, Southwest has been able to offer overnight flights since 2017 thanks to its upgraded reservation system but has waited years to implement the option.

Southwest Airlines passengers stand around dozens of bags during the carrier's December 2022 meltdown.
Southwest Airlines passengers stand around dozens of bags during the carrier's December 2022 meltdown.Irfan Khan/Los Angeles Times via Getty Images

"It wasn't a reservation system limitation at the time," Harteveldt said, referring to when Southwest upgraded its IT. "It may have been a limitation within other parts of Southwest's operational infrastructure."

Updated technology behind the scenes could improve the customer experience

Elliott pointed to Southwest's outdated systems in its proposal, citing a December 2022 meltdown that left millions of people stranded due to Southwest's antiquated crew-scheduling software that couldn't keep up with the disruptions.

Beyond that, Harteveldt said Southwest's reservation system does not accept foreign currency. In fact, the carrier can't fly to Canada because it does not accept Canadian dollars, as required by local law.

Southwest has only recently invested in systems that would allow it to codeshare with other airlines, Harteveldt said — another modern strategy common among many US airlines.

American Airlines oneworld livery.
American Airlines oneworld livery.Tupungato/Shutterstock

Codesharing could open overseas connectivity to Europe and Asia, for example, similar to Alaska's partnership with the Oneworld alliance.

"In some ways, what Elliot may do is force Southwest to accelerate making some of the changes it has already been considering, and that's not a bad thing," Harteveldt said.

Regardless, experts said Southwest's challenge lies in making any short or long-term changes without disrupting its huge consumer base — people loyal to the airline because of its extensive freebies and customer-focused culture.

Southwest has defended its CEO and board, telling BI it looks "forward to better understanding [Elliott's] views on our company." Jordan told reporters after an event in Washington on June 12 that he had no intention of resigning, Reuters reported.

"We want to understand what their ideas are, they may have great ideas," he said. "At the end of the day, we are going to treat Elliott like any other investor. We'll sit down and listen to them."

Read the original article on Business Insider