Activist Investor Pushes for Major Change at Southwest

An activist investor has taken a major position in Southwest Airlines and is pushing for some massive changes within the organization. The investment management firm has published a letter to the airline’s board of directors outlining some of the changes they would like to see in order to improve the carriers financial performance.

Activist Investor Takes an 11% Stake in Southwest

Elliott Investment Management L.P. has taken a $1.9 billion position in the Dallas based carrier, representing roughly 11% of the airlines outstanding shares. This makes them one of the largest investors in the company. Elliott states in their letter to the board that the company’s “poor execution and leadership’s stubborn unwillingness to evolve the Company’s strategy have led to deeply disappointing results for shareholders, employees and customers alike.”

a plane parked at an airport
An activist investor is looking to shake things up at Southwest.

In recent years the airline has also struggled with outdated technology and operational processes. This is also called out in the letter to the board and Elliott specifically mentions the operational meltdown Southwest experienced in December of 2022. That month the airline stranded over two million passengers during the busy holiday travel period.

The letter continues to paint a scathing picture for an airline that has continued to post profits year after year, even when competitors reported losses. The letter to the board calls for new leadership at the airline and repeatedly calls out Southwest CEO Bob Jordan.

Southwest CEO Bob Jordan has delivered unacceptable financial and operational performance quarter after quarter, resulting in seven negative guidance revisions in the last 17 months.

Elliott Investment Management’s letter to the Southwest Board of Directors

Stronger Southwest

Elliott has put together a presentation and a website around their proposed improvements in their “Stronger Southwest” plan. In the letter to the board the investment firm outlined the following three areas:

  • (1)  Enhance the Board of Directors: The Board should be reconstituted with new, truly independent directors from outside of Southwest who have best-in-class expertise in airlines, customer experience and technology.
  • (2)  Upgrade Leadership: Southwest must bring in new leadership from outside of the Company to improve operational execution and lead the evolution of Southwest’s strategy.
  • (3)  Undertake a Comprehensive Business Review: Southwest should form a new management and Board-level committee to evaluate all available opportunities to rapidly restore the Company’s performance to best-in-class standards. This review would modernize Southwest’s strategy and operations with a focus on increased customer choice, improved cost execution and updating outdated IT systems, among other opportunities, and it should leverage the fresh perspectives of the new directors to help formulate the optimal go-forward plan for Southwest.

The firm believes that, by executing on the Stronger Southwest plan, the airline’s stock will rise to $49 per share within 12 months. The letter to the board states Elliott’s belief that Southwest represents the most compelling airline turnaround opportunity in the last two decades. If you look at everything that has happened in the industry over the last 20 years, that’s quite the statement.

At the time of this post, the airline stock was trading under $30 per share, near the lows seen during the early months of the COVID-19 lockdowns.

a graph of a price
Southwest shares are down more than 40% over the last 5 years.

Changes at Southwest

The rumor mill has been churning for months about changes at the airline. Prior to today’s announcement by Elliott, Southwest CEO Bob Jordan told listeners on the carrier’s Q1 earnings call that they are “evaluating options to enhance our customer experience as we study product preferences and expectations, including onboard seating and our cabins.

Southwest has long had a unique business model that set itself apart from other carriers. The airline has never had assigned seats, charged for luggage, or imposed change fees on passengers. All aircraft are equipped in a single-cabin Economy configuration and boarding positions are assigned at check-in. Once onboard, seating is a free-for-all and passengers can take any unoccupied seat.

Some passengers enjoy Southwest’s approach though many frequent flyers, myself included, do not. In recent years many airlines have eliminated change fees and provide free checked bags for status and credit card holders. This eliminates two of the major selling points for Southwest. The airline was also once known for its low fares but in recent years flights have been priced similarly to the big 3 U.S. carriers.

a cup of water and napkin on a table
Southwest has come a long way since it started in 1971, now they need to update the product to match the network.

The only things that are still differentiators for the airline do more to detract from the experience instead of add to it. Instead of having time to relax in the lounge or grab a bite to eat before your flight, you better be at your departure gate prior to scheduled boarding or you could find yourself in a middle seat next to the bathroom, regardless of your ticket type.

Without overhauling any existing aircraft I’d like to see the airline at least scrap the boarding process in favor of assigned seating. I know I’d rather pay extra to secure one of the exit row seats with endless legroom instead of paying for priority boarding and gambling on whether it will still be available by the time I board.

I haven’t been wowed by my recent experiences with Southwest and it will be interesting to watch the changes that occur over the next few months.

Summary

Change is coming to Southwest Airlines. Activist investor Elliott Investment Management has taken a $1.9 billion stake in the airline and is looking to changes in leadership and operations to increase shareholder value. The next couple of months will be interesting as we wait and see how the airline responds.

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