(Reuters) – Southwest Airlines beat analysts’ expectations for second-quarter profit on Thursday and said it would introduce both assigned and premium seating in its cabins, marking a significant shift away from its traditional business model.
Shares of the carrier were up 4.2% in premarket trading.
Airlines are enjoying a summer travel boom, borne out by the fact that more than 3 million people passed through U.S. airport security checkpoints on July 7.
However, carriers have increased seats in the domestic market in excess of demand, pressuring airfares at the price-sensitive end of the market.
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 said its unit costs, excluding fuel, were better than expected, due in part to cost mitigation efforts, including voluntary time off.
On the other hand, demand for premium seats has gone up. Delta Air Lines reported a double-digit increase in revenue from its premium cabins in the second quarter, while sales in its main cabins remained flat.
Southwest, which lowered its second-quarter unit revenue forecast last month, is also facing pressure from activist investor Elliott Investment Management, which is pushing for a management and board overhaul.
Elliott took an about 11% stake in the carrier and has urged it to consider making commercial changes to its business model, including exploring revenue opportunities such as assigned seats, checked bag fees and premium products.
Historically, Southwest has shied away from these changes.
“We are taking urgent and deliberate steps to mitigate near-term revenue challenges…,” Southwest CEO Bob Jordan said on Thursday.
The airline has also been hit hard by Boeing’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.
Southwest reported total operating revenue of $7.35 billion in the quarter ended June 30, compared with Wall Street expectations of $7.32 billion.
(Reporting by Shivansh Tiwary in Bengaluru; Editing by Pooja Desai)
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