Southwest Airlines turns to assigned and premium seats to lift earnings

(Reuters) – Southwest Airlines (NYSE:) on Thursday announced sweeping changes, including plans to end open seating and offer seats with extra legroom on its airplanes as it faces pressure from an activist investor to improve financial results.

The move marks a significant shift away from its traditional business model and came alongside its second-quarter earnings, which topped Wall Street estimates.

Southwest’s shares were down 6% in premarket trading.

The Dallas-based airline is under pressure from activist investor Elliott Investment Management, which has warned of a proxy fight to push for leadership changes.

The company expects the changes to strengthen financial performance. It plans to share more details at its investor day in September.

Southwest said it research shows that 80% of its customers, and 86% of potential customers prefer an assigned seat.

It also has plans to offer premium, extended legroom seats, which will account roughly one-third of seats across its fleet.

“We are taking urgent and deliberate steps to mitigate near-term revenue challenges,” Southwest CEO Bob Jordan said on Thursday.

U.S. carriers have been reporting strong demand for high-margin premium cabins. Alaska Airlines last week said it would add 1.3 million premium seats annually to its mainline fleet.

Southwest reported second-quarter adjusted profit of 58 cents per share, about half of what it reported a year earlier, but managed to beat analysts’ average estimate of 51 cents per share, according to LSEG data.

It reported a 3.8% year-on-year decline in unit revenue in the quarter, citing excess industry-wide domestic capacity. It expects third-quarter unit revenue to be flat to down 2%.

The airline has been hit hard by Boeing (NYSE:)’s jet delivery delays and is reeling from elevated operating expenses, including high aircraft maintenance costs, as it keeps older planes in the air.

Southwest said it was in discussions with Boeing about the negative financial impact it faces from the delayed deliveries.