Jefferies Upgrades Southwest Airlines to Hold on Strategic Reforms

Investment bank Jefferies has upgraded its rating for Southwest Airlines (LUV.US) from "underperform" to "hold" following a meeting with the company's CEO, Bob Jordan, and CFO, Tom Doxey. The upgrade reflects growing confidence in the airline's series of achievable reforms. Analyst Sheila Kahyaoglu highlighted that the company's strategic adjustments, driven by data, are expected to enhance its operational efficiency and profitability.

The strategic initiatives recognized by Jefferies include the enhancement of cabin classes by introducing paid seat selection and increased legroom, the launch of red-eye flights, the establishment of international partnerships, prudent control of capital expenditures, and the monetization of fleet assets. These changes are aimed at improving the overall passenger experience and operational efficiency.

Southwest Airlines has set a target of increasing its available seat miles (ASM) by 1% to 2% annually by 2027, which is seen as a benchmark for restoring profitability. Jefferies emphasized that execution will be the critical challenge in this large-scale transformation. The firm also noted the importance of meeting the planned EBIT (Earnings Before Interest and Taxes) increases of $1.8 billion in 2025 and $4.3 billion in 2026, as well as maintaining an investment-grade balance sheet.

In addition to these strategic moves, Southwest Airlines announced new baggage fees starting from May 28. The first checked bag will cost $35, and the second will cost $45. These fees are in line with those charged by other major U.S. airlines, reflecting a broader industry trend towards monetizing ancillary services.