Southwest Airlines (LUV, Financial), currently facing a proxy battle with Elliott Management, has seen a turbulent year. However, the stock is climbing today after the budget carrier unveiled its transformational plan and updates ahead of its Investor Day. Notably, LUV revised its Q3 RASM guidance to +2-3% and outlined a strategy to generate an additional $4 billion in EBIT by 2027.
- LUV's lack of international flights and no-frills service has hindered its ability to fully capitalize on strong travel demand and profitable trends, unlike competitors United Airlines (UAL, Financial), American Airlines (AAL, Financial), and Delta Airlines (DAL, Financial).
- In Q3, LUV benefited from a CrowdStrike (CRWD, Financial) outage in July, which led stranded passengers to book with LUV. This, along with improving demand trends, allowed LUV to revise its Q3 RASM outlook to +2-3% from a prior forecast of flat to -2%.
- LUV aims to regain its best-in-class profit status, having posted a 5.5% operating margin in Q2, trailing behind DAL's 14.7% and UAL's 13.1%.
- For the first time, LUV will sell assigned seats starting in 2H25, including premium seats with extra legroom, creating a new high-margin revenue stream.
- New redeye flights will be added in February, offering more options for customers and optimizing aircraft utilization.
- LUV plans to minimize hiring over the next few years, optimize scheduling efficiency, and capitalize on supply chain opportunities. The company expects to reduce average aircraft capital expenditures to around $500 million through 2027.
LUV also announced a new $2.5 billion share repurchase program. Whether these measures will satisfy Elliott Management's demands for a Board overhaul remains uncertain, but other shareholders are clearly supportive of the moves.
