Southwest Airlines is getting rid of open seating

New York (CNN) — Southwest Airlines is shifting to assigned seats for the first time in its history, a change that will allow the low-fare carrier to charge a premium for some of the seats on its planes.

The airline will also start offering overnight “red-eye” flights for the first time, which it said will improve the efficiency by increasing the use of its aircraft.

Southwest said customers were clamoring for these changes – when people switch to a competitor from Southwest, the company said the No. 1 reason the unhappy passengers cite is open seating. But the change will also help the company charge some passengers more for their tickets.

“The research is clear and indicates that 80% of Southwest customers, and 86% of potential customers, prefer an assigned seat,” said the airline in a statement. “By moving to an assigned seating model, Southwest expects to broaden its appeal and attract more flying from its current and future customers.”

Southwest did not give details about when the changes will go into effect, but it said it would be discussed further in September.

A tectonic shift

The airline had announced in April that it was looking at a change in its seating policy that has been in effect for its entire 50 year history. Southwest is under pressure from activist investors who have been pushing for changes in management and growth in profitability.

Southwest has long been known as a low-cost, low-fare carrier, but it has been facing competition from the three other major carriers, American, United and Delta, which get much of their revenue from charging more for premium seating. It also faces growing rivalries on the other end of the spectrum: ultra-low cost carriers, such as Spirit and Frontier, which offer bargain-priced seats for which customers have to pay extra for just about anything including carry on bags.

Southwest doesn’t charge for carry on bags and has long allowed passengers to check two bags for free. The airline also doesn’t charge customers to change flights.

The company made no mention in its statement about whether it will change its baggage or change fee policy. The premium seats, which will offer more legroom, will not be available until 2025 as it will require reconfiguring its planes.

An ailing business

Southwest used to be the most profitable US airline. But that is no longer the case.

Thursday, it reported a 51% drop in adjusted profit to $370 million, despite reporting record revenue for the quarter that was boosted by strong passenger traffic.

But this has been a tough environment for US airlines to make money. Significant increases in labor costs and higher fuel prices, two of the largest expenses in the industry, have eaten into profits. And relatively low average fares have exacerbated the damage.

Rival American Airlines also reported its profit fell 44% in the second quarter, despite its own record revenue.

Although Southwest still has the healthiest credit rating of any US airline, it has been struggling with a number of issues in recent years – some as a result of its own mismanagement, but some because of outside factors and changing industry dynamics.

Shares of Southwest (LUV) were down more than 4% in premarket trading on its news.

Ending five decades of precedent

The airline went 47 consecutive years without reporting an annual loss – until 2020, when the pandemic nearly halted all demand for air travel.

Southwest’s fleet is made up entirely of Boeing 737 jets. That had reduced its operating costs, because it allowed its pilots to fly any of its planes, giving it a flexibility and efficiency not available to its larger rivals. But it also made it most susceptible to Boeing’s substantial problems in recent years – both a 20-month grounding of the 737 Max in 2019 and 2020 following two fatal crashes, and a slowdown in production this year due to concerns about the quality and safety of its planes.

But its low-cost efforts also hurt Southwest at times, most notably in December 2022, when its suffered a catastrophic service meltdown that caused it to cancel about 17,000 flights, or nearly half of its schedule, during the busy holiday travel period. While other airlines recovered quickly from a winter storm that month, Southwest’s computer technology, denounced as “antiquated” by its unions, made it difficult for it to schedule its pilots and flight attendants and resume normal operations.

Southwest made changes in its software and operations in the wake of those service issues. And last week, as many of the world’s airlines were forced to cancel 5,000 flights in a single day due to a flawed software update from cyber security firm CrowdStrike, Southwest was one of the few carriers that avoided the issue and did not have to cancel flights. This time it was rival Delta Air Lines that suffered the service meltdown.

But that December 2022 meltdown cost Southwest around $1 billion, including a $140 million fine from the Department of Transportation. And it resulted in a loss in the fourth quarter of 2022 as well as the first quarter of 2023 as passengers were reluctant to book on airline in the immediate aftermath of the service problems.

The company reported losses in the fourth quarter of 2023 and first quarter of 2024 as well amid higher labor and fuel costs. Losing money in four of six quarters before the most recent period is a stunning and unwanted reversal of fortunes for Southwest. The airline had previously posted losses only during the pandemic, Great Recession and after the September 11 terrorist attacks – even while its rivals were flying in and out of bankruptcy. It also brought unwanted attention from activists investors at Elliott Investment Management, which announced in June it had taken a $1.9 billion stake in the airline and called for management changes.

Incidents raise safety concerns

Southwest has also gotten unwanted attention from the Federal Aviation Administration, which announced earlier this month it is stepping up oversight of its operations due to a number of potentially dangerous incidents involving its planes in recent months.

In March, a Southwest jet veered off course and had a close call with an air traffic control tower during an attempted landing at New York’s LaGuardia Airport. In April, a plane plunged to within 400 feet of the surface of the Pacific Ocean off the coast of Hawaii. In June another plane came within 525 feet of the ground over an Oklahoma town when it was still nine miles away from the Oklahoma City airport. And later that month a plane took off on a closed runway at the airport in Portland Maine which had a repair vehicle on it that had to race to get out of its way. Earlier this month, a plane got within 150 feet of the ground when it was still five miles away from the airport in Tampa, according to data from Flightradar24.

“The FAA has increased oversight of Southwest Airlines to ensure it is complying with federal safety regulations,” the agency said in a statement.

Southwest said it has formed an internal team to also look at the incidents.

“Southwest is working closely with the Federal Aviation Administration in the review of recent events,” it said.

CNN’s Ross Levitt, Gregory Wallace, Chris Boyette and Pete Muntean contributed to this report.

This story has been updated with additional context and developments.

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