Shares jumped 10% in early trading Thursday after the company also said it boosted its third-quarter revenue forecast.
The pioneering low-cost carrier has been hard-pressed for new high-margin revenue streams as its costs have ballooned and as it faces pressure from activist investor Elliott Management to shake up its management.
Investors and analysts gathering in Dallas on Thursday for Southwest's first public investor meeting since 2022 want to see a credible strategy and timeline to restore its long-term profitability. The company's operating margin fell to 0.2% in the first half of this year from more than 13% in 2019.
The stakes are high. Elliott Investment Management has launched a campaign to oust CEO Bob Jordan and replace two-thirds of Southwest's 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.
The initiatives announced Thursday augment previous plans to switch to assigned and extra-legroom seats to attract premium travelers, and start overnight flights. The carrier, however, will continue with its bags fly free policy.
Southwest said these measures would contribute about $4 billion in incremental earnings before interest and taxes (EBIT) by 2027. It expects to produce at least a 10% operating margin, 15% return on its invested capital and more than $1 billion in free cash flow in three years.
Savanthi Syth, airline analyst at Raymond James, said while Southwest 2027 targets are encouraging, the airline will have show it can deliver.
It raised its revenue forecast for the third quarter. Its revenue per available seat mile is now expected to be up 2%-3% in the September quarter from a year ago, compared with its previous forecast of flat to down 2%. It also announced a new $2.5 billion share buyback program.
Southwest once boasted a record 47 consecutive years of profit before the COVID-19 pandemic. But aircraft delivery delays by planemaker Boeing (BA.N), excess capacity in the domestic airline industry and post-pandemic travel patterns have depressed 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.
While Southwest 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 airline said it intends to monetize the value of its Boeing (BA.N) 737 fleet and is considering selling its new planes to leasing companies.
Shortages of new aircraft have made so-called sale-and-leaseback transactions a moneymaker for some airlines. Southwest has nearly 700 new Boeing aircraft on order through 2031.
The company said it will launch a partnership with Icelandair in early 2025 for transatlantic connectivity. It plans to add at least one additional partner carrier next year.
The airline will also start selling vacation packages to customers.
Southwest said it plans to keep its annual capacity growth between 1% and 2% between 2025 and 2027, and further reduce the time it takes to turn a plane to increase its aircraft productivity.
Analysts say capacity discipline would help as excess supply of seats in the domestic market dampens airfares.
Southwest also appointed Robert Fornaro, the former chief executive of AirTran and Spirit Airlines, as a member of its board.
