Southwest Responds To Elliott’s Letter Demanding Leadership Upgrade

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Summary

  • Elliot Investment Management, which accumulated a stake in Southwest Airlines worth around $2 billion, harshly criticized the airline’s leadership.
  • It presented a plan called ‘Stronger Southwest,’ recommending significant changes within the carrier’s leadership.
  • In its rebuke, Southwest Airlines expressed confidence in its current leadership and business model.

After Elliott Investment Management (Elliot) had confirmed that it purchased shares in Southwest Airlines and published an open letter that the investment firm sent to the airline’s Board, the carrier responded by expressing confidence in the current C-suite and its leadership team.

Stronger Southwest

In the letter to Southwest Airlines’ Board of Directors, composed of 14 members, including Gary Kelly, the former chief executive officer (CEO) of Southwest Airlines, Elliot outlined that it has a plan called ‘Stronger Southwest,’ with the investment firm providing three recommendations to the Board.

A Southwest Airlines Boeing 737 on an airport apron.

Photo: Ceri Breeze | Shutterstock

According to Elliot, the company’s leaders should enhance the Board, upgrade its leadership, and complete a comprehensive business review. The execution of the plan should result in Southwest Airlines returning to being an industry leader, generating best-in-class margins and compelling returns for its shareholders. The investment firm estimated that by executing the ‘Stronger Southwest’ plan, the company’s stock should rise from its current stock price of $29.70 when trading closed on June 10 to $49 in 12 months, representing a 77% return during the period.

Reports began surfacing that Elliot had purchased Southwest Airlines shares worth around $2 billion on June 10. The investment firm eventually confirmed the development, prefacing its letter that it owned around 11% of the airline’s total shares, making it one of the largest investors in the company.

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If it were to come to fruition, Elliot Investment Management would become the largest institutional shareholder in Southwest Airlines.

Turnaround opportunity

Elliot’s letter read that while Southwest Airlines was a legendary airline with a proud history, now, “poor execution and leadership’s stubborn unwillingness” to move the company forward have led to deeply disappointing results for shareholders, employees, and customers. Bob Jordan, the president and CEO of Southwest Airlines, admitted that the airline underperformed financially when the carrier announced its Q1 2024 results on April 25. The airline’s net loss was $231 million during the first quarter of the year.

A Southwest Airlines Boeing 737 MAX 8 flying in the sky.

Photo: Vincenzo Pace | Simple Flying

Nevertheless, Elliot continued to criticize the airline’s leadership, saying that while its counterparts continue seeing record revenues – Southwest Airlines said that its Q1 revenues were record-breaking – the carrier’s performance has resulted in negative returns to shareholders and cost tens of thousands of dollars for the average employee, whose profit-sharing benefits and retirement plans tied to its shares directly correlated with the airline’s performance.

“After 18 months of intensive research, we are convinced that Southwest represents the most compelling airline turnaround opportunity in the last two decades.”

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Failing to hold management accountable

The investment firm blasted the airline for its decades-old approach, which resulted in its inability to compete in today’s world, with Southwest Airlines now working with outdated software, a dated monetization strategy, and antiquated operational processes. Its modernization failures were underscored by the operational meltdown in December 2022, Elliott added.

Southwest Airlines Boeing 737-8H4 at Orlando International Airport.

Photo: Orlando International Airport

Elliot also took an opportunity to criticize Jordan and Kelly, who, according to the firm, oversaw the airline during a period of severe underperformance. They are not up to the task of modernizing Southwest Airlines, with Jordan continuously delivering unacceptable financial and operational performance each quarter, underlined by seven negative guidance revisions in the last 17 months.

“Southwest’s unit costs – a core priority for a low-cost carrier – have ballooned, while unit revenues have lagged peers. 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.”

During the Q1 2024 analysts’ call, Jordan admitted that the airline has to increase revenue production to offset cost inflation. The most significant opportunity to improve performance in the short term was its network optimization efforts, the CEO added. The airline planned to end services at at least four airports by August.

Southwest Airlines Boeing 737 MAX 8 landing at ALB shutterstock_2359129549

Photo: dorengo5 | Shutterstock

Still, Elliot was also unhappy that there has been no accountability for Southwest Airlines’ poor results, including no repercussions following the December 2022 operational meltdown. According to the investment firm, no senior executives lost their roles after the week-long event and to add insult to injury, “the Board nearly doubled the compensation of all key executives in the year after the incident.”

“We believe that new leadership is required at Southwest. While Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with a strategy that no longer succeeds in the modern airline industry.”

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Confidence in its current leadership

Concluding its letter, Elliot expanded on the three action points in its ‘Stronger Southwest’ plan. Firstly, the airline’s Board should be rebuilt with new and truly independent directors from outside the company. Secondly, the carrier should bring in new C-suite leadership from outside the company to lead the airline’s evolution.

Lastly, Southwest Airlines needs to form a management and Board-level committee to evaluate opportunities to “rapidly” restore its performance. The review should focus on modernizing the carrier’s operations, focusing on more choices for its consumers – alluding to the airline’s current free-for-all seating arrangements, which Southwest Airlines is looking to change – improved cost management, and updates to its IT infrastructure.

A snow-covered Southwest Airlines Boeing 737 parked at a gate at Denver International Airport.

Photo: Steve Heap | Shutterstock

The investment firm reiterated that it would bring back the airline’s stock price to $49 in 12 months, adding that it was available for a meeting with Southwest Airlines at the latter’s earliest convenience to discuss the outlined issues in greater detail.

Firing back, Southwest Airlines issued a public response to the letter, saying that it maintains an open dialogue with its shareholders, with the airline’s leadership reviewing Elliot’s letter and presentation.

“We are confident that Southwest Airlines has the right strategy, the right plan, and the right team in place to drive long-term value for our Shareholders.”

Southwest Airlines affirmed that it has recently implemented a new revenue management system, which, combined with its ongoing review of transformational initiatives, was a tangible step in potentially improving its financial and operational performance. Once again, the airline teased that it would unveil more during its Investor Day in September.

RECARO Southwest Airlines seatback design

Photo: RECARO

At the same time, the carrier expressed confidence in its CEO and leadership team, noting that the Board diligently reviews its strategy and leadership team constantly. Furthermore, Southwest Airlines has added seven new independent directors to its Board, providing fresh perspectives while maintaining continuity in its management.

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