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Activist investor wants to oust Southwest ( LUV ) leadership

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CEO Jordan to outline turnaround strategy on Thursday

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Airline plans seating policy and network changes

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Analysts say airline suffering for not planning ahead

By Rajesh Kumar Singh

CHICAGO, Sept 25 (Reuters) - Southwest Airlines ( LUV ),

the pioneering low-cost carrier, is facing a campaign by an

activist investor to overhaul a business model it says is

outdated, putting pressure on CEO Robert Jordan and leaving the

airline scrambling to modernize, analysts say.

This comes ahead of an investor day on Thursday, where

Jordan is expected to outline a plan to restore the carrier's

long-term profitability - a standard investors came to expect

from the airline before the pandemic.

The proposed changes include plans to switch to assigned

seating and extra-legroom seating - higher-margin offerings that

competitors like Delta and United Airlines

embraced years ago.

Ahead of the investor meeting, its chief operating officer,

Andrew Watterson, told staff in a video message that the airline

needed to change its network to account for shifts in business

travel patterns after the pandemic.

While that would entail bigger changes for some cities, the

airline has no plans to stop serving them, Watterson said,

according to a transcript of the video reviewed by Reuters.

"It's a delicate balancing act, and it requires difficult

decisions," he said, without sharing more details.

Analysts and investors, including hedge fund Elliott

Investment Management, have expressed concern that the airline

is rigidly committed to a playbook developed decades ago and

that some of the proposed changes may be too little, too late.

Elliott has launched a campaign to oust Jordan and other top

executives.

The hedge fund said on Tuesday it plans to request a special

meeting of Southwest's ( LUV ) shareholders as soon as next week to

overhaul leadership. In response, the airline ruled out any

leadership change and said it was carrying out a "significant

transformation" of its business that would improve its financial

results.

Southwest ( LUV ), which once boasted a record 47 consecutive years

of profit prior to the pandemic, is currently struggling to

regain sustained profitability. Interviews with analysts,

investors, and workers suggest that the airline's long-running

success may have led to overconfidence and stubbornness among

its leaders.

"They have been far too ingrown and ... far too smitten with

'we've got to do it the Southwest ( LUV ) way,'" said Rob Britton, a

professor at Georgetown University.

In response to the criticisms, a Southwest ( LUV ) spokesperson said

the company typically does not make a decision unless there is

data to support it.

"Throughout its history, Southwest ( LUV ) has been very deliberate

in decision making when it comes to the markets it serves and

its business model," the spokesperson said.

PREMIUM TRAVEL

In an example of strategic missteps, Southwest ( LUV ) decided to

expand into 18 new markets during the pandemic - a strategy that

had previously helped the airline gain market share during

downturns. However, government-funded pandemic aid changed the

operating landscape, and Southwest's ( LUV ) continued expansion hurt

its margins.

Analysts have also criticized Southwest's ( LUV ) slow response to

growing demand by travelers for premium travel, which tends to

be a source of high-margin revenue for airlines. The company

initially dismissed this trend as "highly cyclical" in January

but reversed its stance six months later by unveiling plans to

attract premium travelers with assigned and extra-legroom seats.

"Southwest ( LUV ) is an example of complacency at work and all the

risks that brings to business," said Henry Harteveldt, founder

of travel consultancy Atmosphere Research Group.

The airline has also been criticized for its slow adoption

of new technologies. For example, Southwest ( LUV ) implemented the

SkyPath software only this year, an application that uses iPad

sensors and GPS data to help navigate turbulence. The software

has been used by United and American Airlines ( AAL ) pilots for

years.

Southwest ( LUV ) said the application's rollout required finding a

way to integrate it into its system and making sure its pilots

had the necessary support and training.

On a podcast last month, Jordan said the airline has

invested in technology like "crazy." He credited those

investments for Southwest's ( LUV ) relatively smooth operations in July

when a global cyber outage grounded flights worldwide.

INTERNATIONAL MARKETS

Southwest's ( LUV ) ruthless focus on costs underpinned its success

before the pandemic. But operating expenses have surged, with

the company spending 99% of its revenue on operating costs last

year, up from about 80% in 2015.

Furthermore, Southwest's ( LUV ) reliance on Boeing ( BA ) has

proven costly, as the planemaker's production and regulatory

challenges have forced the airline to operate aircraft it did

not plan to fly.

Brett Snyder, an airline analyst, suggests that Southwest's ( LUV )

problems stem from a failure to plan for the future when its

business was still humming.

Some say the lack of foresight has left the airline without

more diversified revenue streams and vulnerable to softening

domestic fares. Unlike peers such as European carrier Ryanair

, Southwest's ( LUV ) flights were not available for booking on

third-party platforms until recently. It still sells tickets

only in U.S. dollar, inhibiting its ability to serve customers

overseas.

Southwest's ( LUV ) challenges highlight the need for the airline to

identify and capitalize on new growth opportunities beyond its

existing fleet and network, Snyder added.

"The airline was going to run out of traditional growth

opportunities with its existing fleet and network," he said.

"One of the failings was to really look more forward as

opposed to living in the present."