Elliott Investment Management, a firm owning a large share of Southwest Airlines’ stock, is calling for major leadership and strategic changes to guide the airline into a more-profitable future.
The Florida-based firm disclosed in a 10 June letter to Southwest’s board of directors that it now holds an 11% “economic interest” in Southwest thanks to a recent $1.9 billion investment, making it one of the carrier’s top investors.
After 18 months of research, Elliott concluded Southwest “represents the most-compelling airline turnaround opportunity in the last two decades”.
“The significant investment we have made reflects our conviction that, with the right leadership, Southwest can regain its status as an industry-leading airline,” the firm says.
Elliott does not mince words regarding Southwest’s current position, which it says is defined by “a rigid commitment to an approach developed decades ago”.
“Poor execution and leadership’s stubborn unwillingness to evolve the company’s strategy have led to deeply disappointing results for shareholders, employees and customers,” says the investment company. ”Southwest’s share price has declined by more than 50% in the past three years and has now fallen below the levels at which it traded in March 2020, during the depths of the Covid-related travel shut downs.”
Elliott calls specifically for Southwest to “enhance” its board with “truly independent directors from outside of Southwest”, bring in new senior leadership and undertake a comprehensive review of its business to “rapidly restore the company’s performance to best-in-class standards”.
Southwest says it maintains an “open dialogue with shareholders” regarding its value, adding that it looks forward to “better understanding [Elliott’s] views on our company”.
“The Southwest board of directors is confident in our CEO and management’s ability to execute against the company’s strategic plan to drive long-term value for all shareholders, safely and reliably serve our customers and deliver on our commitments to all of our stakeholders,” the carrier says.
Major changes may already be underway for the Dallas-based carrier. In April, chief executive Bob Jordan said the company might switch up its single-class cabins, hinting at the possibility of departing from its signature system of no assigned seats.
“We are considering more transformational options and follow-on initiatives that include work previously underway to study customer preference around seating in our cabin,” Jordan said at the time. He added that the carrier is weighing the economic and operational implications of making such a change, and that no decision had been made.
The carrier is retooling on other fronts after reporting a $231 million loss during the first quarter. It is cutting several destinations from its network and has “essentially frozen and stopped all hiring except for a limited number of critical positions”, Jordan said during the company’s most-recent earnings call. The company is also offering pilots voluntary unpaid time off, and expects to trim its workforce and end the year with 2,000 fewer employees than it had at the end of 2023.
Meanwhile, United Airlines CEO Scott Kirby says his company has moved in on Southwest’s market share since adopting a policy of not charging fees for itinerary changes or flight cancellations.
In a biting analysis, Elliott argues Southwest is failing to effectively compete in the modern airline industry.
“This ethos pervades the entire business with outdated software, a dated monetisation strategy and antiquated operational processes,” it says. ”This failure to modernise is vividly underscored by the December 2022 operational meltdown that was caused by the company’s outdated technology, which led to Southwest stranding over 2 million customers over the holidays.”
”In a clear display of poor leadership, CEO Bob Jordan declined to testify in front of Congress after the meltdown,” it adds.
Elliott singles out Jordan and executive chairman Gary Kelly for presiding over a “period of severe under-performance” at Southwest.
“Since his appointment… Jordan has delivered unacceptable financial and operational performance quarter after quarter, resulting in seven negative guidance revisions in the last 17 months,” the firm says. ”Even as the company’s performance has deteriorated, Jordan has demonstrated a surprising level of complacency, describing each quarter as ‘great’ or ‘strong’ while the earnings outlook continues to fall.”
Elliott further blasts Southwest’s “insular culture”, pointing to a lack of board directors with experience at other airlines, and a similarly composed management team.
”This board has in turn selected a management team that, of the eight most senior executives, includes only one executive with experience at another airline,” the firm says, adding: “We believe that new leadership is required at Southwest.”
