Southwest Airlines is ending open seating and can offer seats with more legroom on its aircraft as increasing pressure on the airline to extend revenue prompts the most important changes to its business model in its 53-year history.
The airline plans to sell the primary flights with more legroom next yr, it said on Thursday. Night flights are also planned from February.
Southwest executives have said for years that they’re exploring such changes, and in April indicated that the airline was seriously considering assigning seats and offering more legroom. Currently, the airline sorts customers into one among three boarding groups and assigns them a number, which creates a mad rush to examine within the day before the flight. However, customers can board earlier, and paying for a costlier ticket will get them a greater boarding slot.
When travelers select a competitor over Southwest, the airline's study found that the open seat model is the first reason for that selection, the airline said in a press release explaining the changes. It also said that 80 percent of its own customers prefer a set seat.
“Although our unique open seating model has been part of Southwest Airlines since our inception, our careful and extensive research makes it clear that this is the right decision – at the right time – for our customers, our employees and our shareholders,” CEO Bob Jordan said in a press release Thursday.
The Dallas-based airline has prided itself on its easy business model and has generated regular profits over its greater than five many years of operation. But throughout the company's second-quarter earnings call, Jordan reiterated his earlier view that the best way travelers fly has modified and that the airline wants to extend its market share amongst business travelers.
“Customers are simply taking fewer short-haul flights today. They are flying longer, and as they fly longer, the importance of a dedicated seat increases,” Jordan said. “Growth in premium products has outpaced growth in main cabin revenue here for some time, and in other parts of the economy, consumers are simply cutting back on non-essential purchases and spending their money on experiences.”
Southwest, nonetheless, has no plans to vary its popular two-bag-free policy. After fares and schedules, the “bags fly free” policy is the essential reason customers prefer Southwest over the competition, Jordan said on the conference call.
The airline is now under much more pressure to segment its product like other airlines after activist investor Elliott Investment Management announced an almost $2 billion stake in Southwest in June and called for brand spanking new leadership because the airline lagged behind competitors.
Southwest reported a 46% drop in second-quarter profits on Thursday.
Southwest has been working on the seating changes for nearly a yr, and Jordan told CNBC's “Squawk on the Street” on Thursday that it had nothing to do with Elliott's push for leadership and policy changes.
Elliott called for the alternative of Jordan and Southwest Chairman Gary Kelly, each of whom have worked at Southwest for greater than 30 years.
Jordan rejected those calls on Thursday, saying Elliott had “shown no willingness to engage in meaningful conversation.”
“We would like to do that, but it is difficult to have a one-sided dialogue,” he said within the interview with CNBC.
Elliott later said in an announcement that Southwest's changing customer preferences “did not happen overnight; management simply did not do its job.”
“Southwest can do far better, and we look forward to offering our fellow shareholders the opportunity to elect a board of industry leaders that can return Southwest to its best performance,” the corporate said later Thursday.
The airline expects that a few third of the seats on its Boeing 737s can have “extra legroom, similar to that offered on other manufacturers' narrow-body aircraft.” The Federal Aviation Administration (FAA) must approve the cabin layout, the airline added.
Southwest officials didn’t provide specific details on how much revenue they expect to generate from seat reservations or the costlier legroom seats, but said they expect it to be “well over” $1 billion annually, which is the quantity the airline makes from its current ancillary products corresponding to early bird boarding.
Jordan said the airline expects “very little additional” capital expenditure because the change would require a cabin adaptation moderately than the acquisition of a brand new cabin.
Executives said the worth for a seat in standard economy class and a seat with extra legroom won’t be very high.
Analysts criticized Southwest for moving too slowly. Competing airlines offer their customers quite a lot of options to sell them additional services, corresponding to seats with more legroom, premium economy or business class. Other airlines corresponding to delta, United And AmericanFour years ago, it followed Southwest's example and eliminated rebooking fees for many tickets.
Southwest will provide further details on the upcoming changes at an investor day in late September.
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