Southwest Airlines is preparing for a confrontation with Elliott Investment Management, seeking support from investors and employees to counter an activist investor's push for significant changes in company leadership. In recent weeks, CEO Bob Jordan has been engaging with investors to resist Elliott's moves, characterizing the investment firm's tactics as predatory. The hedge fund, on its part, has pointed to Southwest's underperforming stock and its adherence to a long-standing business model as grounds for a board and executive overhaul.
"Don't be misled - this is a struggle for the essence of our company and our destiny - your destiny," Jordan stated in a staff memo on Wednesday, as seen by Reuters. Southwest, known for its low-cost services over its 53-year history, has inspired business school case studies. Similarly, Elliott is recognized for its tough negotiation stance, often securing concessions and ousting CEOs at firms like Starbucks after acquiring a substantial stake.
Elliott has openly expressed its intentions to remove both Jordan and Southwest's board chair Gary Kelly, attributing the airline's financial performance to them, aiming to replace a significant portion of the board, and to alter the company's operational strategies to better compete in the current airline market. The hedge fund lacks a track record in the airline sector, and some analysts fear that drastic changes could harm Southwest's distinctive brand and loyal customer base.
However, Southwest has faced challenges in recovering from the pandemic's impact. The airline has suffered due to its heavy reliance on Boeing for its fleet, compounded by regulatory and safety issues that have hindered Boeing's ability to deliver new planes. Southwest's operating costs have surged by 23% since the pandemic, while unit revenues have only increased by 6%. Its operating margin has plummeted to 0.2% in the first half of this year from over 13% in 2019, compared to Delta and United's margins of 9.5% and 7.4%, respectively, in the first six months.
Southwest has indicated it will consider Elliott's proposals for business improvements, including board modifications, but is not prepared to change its leadership. Sources within the airline suggest that Elliott will not engage in substantive discussions without the removal of Jordan and Kelly. Elliott has declined to comment.
In his message, Jordan affirmed that Southwest would not yield to confrontation. "If it's a fight they desire, it's a fight they will receive," he wrote. Jordan informed staff that he had met with investors on both the East and West Coasts in the past two weeks, and had also held meetings with some union officials, according to company sources.
Southwest requires backing from unions and investors in case Elliott succeeds in calling a special shareholder meeting to oust its leadership, according to experts assisting companies in dealing with activist investors. Oscar Munoz, a former United CEO who faced a proxy battle, expressed skepticism about Elliott's ability to gain shareholder support for installing 10 nominees on the board.
"Regarding the activists, they do raise some valid points," Munoz told Reuters. "How do you address those points?" Munoz believes Southwest may need to make concessions regarding board seats, though he supports Jordan's continued leadership. Southwest plans to end its traditional open seating policy, introducing assigned and extra-legroom seats to attract premium travelers and initiating overnight flights, measures analysts believe could enhance earnings next year. More details are expected next month.
Elliott has criticized these steps as insufficient and overdue. Two anonymous Southwest investors noted that while the airline needs to increase revenue and control costs, Elliott must also disclose its detailed plans for the airline. Elliott anticipates that a new board and independent advisors will conduct a thorough business review to modernize Southwest and restore its profitability, aiming to boost Southwest's stock price to $49 within 12 months, an increase of about 86% from current levels.
Lisa Silverman, a senior managing director at K2 Integrity, a global risk consulting firm, suggested that calling a shareholder meeting could be risky for Elliott, as index-fund investors typically vote in line with management. Jordan informed employees that the possibility of a special shareholder meeting at this stage remains speculative. "Elliott is following a predictable strategy intended to... make you feel they are in control," Jordan said. "They are not."
