Southwest Airlines says assigned seating and premium perks will be available in 2026

The airline will also redesign the sale of holiday packages. The company will pursue partnerships with international airlines, starting with Icelandair next year, which executives say will make Southwest's credit cards and frequent flyer program more attractive.

At Southwest, the original budget airline now well into middle age and suffering from declining financial results, the changes will be the biggest ever.

Southwest executives unveiled the new offers as they came under increasing pressure from an activist investor who wants to replace the airline's management and force a review of its strategy. Southwest's annual profit has declined for the third straight year and its stock price has fallen by more than half since the start of 2021.

“Our model is not broken,” explained CEO Robert Jordan, but he said it needs to be tweaked and “improved.”

“We're not producing the financial results we're capable of delivering,” he said in a meeting with investors at the airline's headquarters in Dallas.

Southwest said its multiyear plan, including changes to its network, will result in pretax profits of about $1.5 billion in 2027.

Southwest had previously outlined the outlines of the changes, including assigned seating and seats with extra legroom, but provided more details on Thursday.

Executives detailed how each of Southwest's four fare tiers will come with perks that get better as the price increases. Executive Vice President Ryan Green said the cheapest fares would not allow customers to select a seat when booking a flight, which could increase the incentive for consumers to move up to the next fare tier.

Jordan said it will take time to make significant changes at an 800-plane airline.

Southwest's reservation system is capable of managing assigned seating, Jordan said, but “we have dozens and dozens of other systems in the company that are designed for vacant seating … and those need to change.”

“There is a lot of risk in doing this badly,” the CEO said.

Southwest has failed to change another of its longstanding features: Passengers can check up to two bags for free, a change from the fees charged by all other leading U.S. airlines. Executives said this was the most important feature in differentiating Southwest from the competition.

U.S. airlines generated more than $7 billion in baggage fee revenue last year, with American and United taking in more than $1 billion each. Wall Street has long argued that Southwest is leaving money behind.

Southwest, which has been running advertising campaigns around the “fly free baggage” theme for years, estimates that baggage fees would bring in about $1.5 billion a year, but eliminating that perk could drive away passengers, costing the airline 1.8 billion US dollars or a net loss of US$300 million per year.

Southwest had been considering a restructuring for months, but the push for radical change became even more important to management this summer when Elliott Investment Management took aim at the company over its weak financial performance in recent years.

The hedge fund blames Southwest executives, portraying them as narrow-minded and insensitive to changing consumer preferences. Elliott, controlled by billionaire financier Paul Singer, wants to replace Jordan and most of Southwest's board.

The hedge fund rejected Southwest's turnaround plan as too little, too late.

“Another promise of a better future from the same people who created the problems we face today,” two Elliott officials said in a statement. “Without credible leadership to put into action, this plan – full of longstanding value propositions – risks becoming the latest in Southwest’s long line of failed improvement initiatives.”

Elliott, the airline's second-largest shareholder, said he plans to call a shareholder meeting as early as next week that could include voting on Southwest's directors. Elliott has a list of 10 board candidates, including former airline CEOs.

Southwest relented this month when it announced that six directors would be leaving in November and Chairman Gary Kelly would step down next year. On Thursday, the company named a former CEO of AirTran and Spirit Airlines to its board, which now consists of 16 members.

Jordan argued that the plan he presented should satisfy investors.

“We do not believe a proxy fight is in the best interest of the company and we remain willing to work with Elliott on a collaborative approach,” Jordan said.

Before Thursday's event began, Southwest announced a $2.5 billion share repurchase program to make existing shares more valuable.

Southwest also said third-quarter revenue would be better than expected, in part because it won over passengers who were stranded on other airlines during the global CrowdStrike technology outage in July. Delta Air Lines was particularly hard hit by the outage.

Shares of Southwest Airlines Co. rose more than 5%.