Downturn in earnings for Southwest, American airlines

Southwest Airlines will replace several members of its board with candidates pushed by Elliott Investment Management to end a months-long fight with the hedge fund, which is pressuring the airline to boost profits and the stock price.

Southwest said Chairman Gary Kelly and six current board members will depart on November 1 and five Elliott-backed candidates will take their places. A special shareholder meeting to elect directors in December was cancelled.

Elliott, the hedge fund led by billionaire financier Paul Singer, achieved most of the demands it has made since June except one: It wanted to oust CEO Robert Jordan.

Southwest announced the shake-up as it reported that its third-quarter profit fell by nearly two-thirds, to US$67 million, on higher costs for labour and other expenses.

American Airlines posted a third-quarter loss of US$149 million.

Competition on domestic routes, particularly from budget carriers, has led to a glut of seats and price-cutting for economy-class tickets. Airline industry officials say that has begun to improve as airlines cut their schedules for the rest of the year.

Southwest said it planned to fly 4 per cent less in the fourth quarter than it did in the same quarter last year. Spirit Airlines has made even bigger cuts.

Both American and Southwest said that excluding special items, their results beat Wall Street expectations.

American said that excluding one-time items, mostly a US$516-million charge tied to a new contract with union flight attendants, it would have earned 30 cents per share. Analysts were expecting adjusted earnings of 16 cents per share, according to a FactSet survey.

Revenue at Fort Worth, Texas-based American rose 1 per cent, to US$13.65 billion, about US$150 million more than analysts expected.

At Southwest, CEO Jordan said the third-quarter profit shows that the airline’s turnaround plan is starting to work. Southwest limited cost increases by offering voluntary time off and limiting hiring, to deal with what it considers overstaffing.

Southwest plans to increase revenue by converting nearly one-third of its seats to premium ones with extra legroom and by assigning seats — ending the long-time practice of letting passengers pick their own seats after boarding the plane.

The Dallas-based airline also said it would speed up repurchase of US$250-million worth of its stock, under a US$2.5-billion share-buyback plan it announced last month.

Southwest said third-quarter profit, excluding special items, works out to 15 cents per share, which beat a forecast of six cents per share among analysts surveyed by FactSet.

Revenue rose 5 per cent, to US$6.87 billion, US$100 million more than the analysts expected.

However, labour costs rose more than 12 per cent, reflecting recent new contracts for pilots, flight attendants and other employees.

AP