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Southwest ( LUV ) struggling to restore profit margins

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Airline expected to share new product and route strategy

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Analysts say airline must address Boeing ( BA ) delay problem

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Activist investor wants to overhaul Southwest ( LUV ) leadership

By Rajesh Kumar Singh

CHICAGO, Sept 26 (Reuters) - Southwest Airlines ( LUV )

will lay out a strategy on Thursday to turn around its business

and restore profit margins to pre-pandemic levels as the U.S.

carrier faces pressure from an activist investor to shake up its

management.

The pioneering low-cost airline once boasted a record 47

consecutive years of profit before the COVID-19 pandemic. But

aircraft delivery delays by planemaker Boeing's ( BA ), excess

capacity in the domestic airline industry and post-pandemic

travel patterns have all combined to depress earnings.

Its passenger volumes are running below pre-pandemic levels

and shares have lost about 40% of their value in the past three

years. It has downgraded its outlook at least eight times in the

past 20 months despite booming travel demand and analysts expect

profit in 2024 to plunge about 83% from a year ago.

As investors and analysts gather in Dallas on Thursday for

Southwest's ( LUV ) first public investor meeting since 2022, they want

a credible strategy and timeline to restore its long-term

profitability.

The stakes are high. Activist investor Elliott Investment

Management has launched a campaign to oust CEO Bob Jordan and

replace two-thirds of Southwest's ( LUV ) board of directors, blaming

them for the airline's underperformance. Elliott plans to

request a special shareholder meeting as soon as next week to

force the changes.

While Southwest ( LUV ) has offered the hedge fund some concessions,

it has repeatedly backed Jordan, calling him the "right leader"

to execute a "significant transformation" of its business and

improve financial results.

The company now has to deliver on that promise.

"It could be perilous for them if they don't execute well,"

said Brian Mulberry, client portfolio manager at Zacks

Investment Management.

Southwest ( LUV ) has already shared preliminary details of its

overhaul - switch to assigned and extra-legroom seats to attract

premium travelers, and start overnight flights.

It has yet to quantify the revenue boost from these

measures. Analysts and investors are also looking for a more

precise timeline of the rollout of extra-leg room seats since

the new cabin layout requires approvals from the U.S. Federal

Aviation Administration (FAA).

The airline is hard pressed for new high-margin revenue

streams as its costs have ballooned and are hurting profits. Its

operating margin declined to 0.2% in the first half of this year

from more than 13% in 2019.

Ahead of Thursday's meeting, the company told staff that the

airline needed to change its network to account for shifts in

business travel patterns after the pandemic.

On Wednesday, it slashed its flights to and from Atlanta and

asked hundreds of its workers to relocate.

Analysts say Southwest ( LUV ) needs to cut more flights across its

network as an excess supply of seats in the domestic market

dampens airfares.

An industry-wide overcapacity has taken a toll on the

earnings of all U.S. airlines, but those with more diversified

revenue streams such as Alaska Air ( ALK ), Delta Air Lines ( DAL )

and United Airlines have performed better.

BOEING PROBLEM

But more importantly, analysts and investors say, the

airline needs a solution to Boeing's ( BA ) aircraft delivery

delays.

Southwest ( LUV ) operates an all-Boeing ( BA ) fleet. It expects to

receive just 20 planes this year, less than one-fourth of its

original plans due to the planemaker's safety crisis.

The delays have left it overstaffed and forced it to defer

the retirement of older and less-fuel efficient jets, driving up

its operating costs.

Moreover, delays in the FAA certification of Boeing's ( BA ) MAX 7

aircraft - the smallest version of MAX planes - have compelled

it to operate MAX 8 planes, which have more seats and are too

big for some of Southwest's ( LUV ) markets.

Flying bigger planes also means more staffing. Analysts at

Raymond James estimate Southwest's ( LUV ) full-time employees per

aircraft increased to 92 last year from 78 in 2018.

"They've been dealt a particularly bad set of cards," said

Robert Mann, a former airline executive who now runs a

consulting firm. "They're really kind of in a rock and a hard

place."