Activist investor Elliott Investment Management has escalated its boardroom battle with the low-cost American carrier Southwest Airlines, saying it plans to request a special shareholder meeting to overhaul the airline’s leadership.
However, the US carrier once again ruled out any leadership change, saying CEO Bob Jordan was the “right leader” to successfully execute its strategy to improve financial performance and drive shareholder value.
The hedge fund has launched a campaign to oust Bob Jordan and other top executives, blaming them for the company’s underperformance. It wants Southwest Airlines to change the way it runs its business and has laid out plans to replace two-thirds of the board’s 15 directors. Elliott owns more than 10% of Southwest stock, enough for it to call a special meeting.
Bob Jordan is a 36-year industry veteran who has guided the company through some of its most trying periods while continuously promoting innovation and transformative projects, according to the company.
During his time with the company, Bob Jordan has overseen several significant initiatives, including the acquisition and integration of AirTran Airways, the creation of Southwest’s e-commerce platform, the introduction of the highly successful Rapid Rewards programme, a complete brand refresh, the expansion of the airline’s domestic route network, the introduction of international flights, and, at the height of the pandemic, the leadership of initiatives on voluntary retirement and leave policies that were essential to the airline’s long-term viability.
The Dallas-based airline has, however, struggled to find its footing after the pandemic, in part due to Boeing’s aircraft delivery delays and industry-wide overcapacity in the domestic market. Its operating margin declined to 0.2% in the first half of 2024 from more than 13% in 2019. In comparison, Delta Air Lines posted an operating margin of 9.5% in the first six months, with United Airlines at 7.4%.
Full Blown Corporate Warfare
In a bid to prevent a proxy fight, the company in September 2024 said six directors would step down in November and Executive Chairman Gary Kelly would retire in 2025. Southwest would appoint four new independent directors shortly and would potentially include up to three candidates proposed by Elliott.
Elliott has accused the airline of obstructing a leadership change, while Southwest, in return, remarked that while its shareholders want it to seek a compromise with the activist investor, “acquiescing to a single shareholder’s demand for absolute control of the company is not a compromise.”
CEO Bob Jordan too stated he has no plans to step down, while stating that he would take Elliott’s criticism into account.
According to Jordan, the carrier is currently in its third generation, and there has been a notable shift in customer preferences. With its low fares, open boarding, and unassigned seating, Southwest established itself as a trailblazer that could “democratise the skies” when it first started operating in the 1970s.
Southwest Under Criticism
The airline has already faced criticism for its resistance to change. For instance, after the Winter Storm in 2022 forced the airline to cancel thousands of flights, Southwest’s antiquated IT systems came under scrutiny.
Additionally, the airline has only recently begun to list its fares on Google Flights. For years, it resisted partnering with the search engine and other online travel agencies to reduce distribution costs and foster client loyalty.
Elliott is also not fond of the fact that most of Southwest Airlines’ executives have been there for an average of 25 years.
Since August 2024, Bob Jordan has been meeting and gathering feedback from investors and union leaders to stave off Elliott’s advances, while casting the investment firm’s approach as predatory.
Southwest has built a reputation through its 53-year history as a low-cost darling of many American travellers, inspiring case studies at business schools. Similarly, Elliott is known as a formidable negotiator, capable of extracting concessions and pushing out CEOs at companies such as Starbucks after amassing a heavy stake.
Elliott has said the new board and independent advisers will carry out a comprehensive business review to modernise Southwest and restore best-in-class profitability. It expects the changes to help drive up Southwest’s stock price to USD 49 within 12 months, up about 86% from current levels.
In April 2024, when Southwest reported a USD 231 million first-quarter loss, Jordan announced that the budget carrier was considering changes to its boarding and seating policies. The airline even took the rare step of dropping four cities from its map. Southwest, however, grew rapidly coming out of the pandemic, adding service to 18 more cities.
Southwest carries the most passengers within the United States, but Delta, United and American, all of which have more extensive international routes, are much larger by revenue. Southwest earned a profit for 47 straight years, an unmatched record in the airline business, till the pandemic broke out in 2020.
Southwest reported record revenue of USD 26.1 billion in 2023, but its USD 465 million profit was down from the previous two years and about one-tenth of Delta’s profit. Delta and United have emerged from the pandemic as by far the most profitable American airlines, and that shows up in their relative stock performance.
Analysts say the lack of foresight has left the airline without more diversified revenue streams and vulnerable to softening domestic fares. Unlike peers such as European carrier Ryanair, Southwest’s flights were not available for booking on third-party platforms until recently. It still sells tickets only in American dollar, inhibiting its ability to serve customers overseas.
Analysts have also criticised the carrier’s slow response to growing demand by travellers for premium travel, which tends to be a source of high-margin revenue for airlines. The company initially dismissed this trend as “highly cyclical” in January 2024 but reversed its stance six months later by unveiling plans to attract premium travellers with assigned and extra-legroom seats.
The airline has also been criticised for its slow adoption of new technologies. It implemented the SkyPath software only in 2024, an application that uses iPad sensors and GPS data to help navigate turbulence. The software has been used by United and American Airlines pilots for years. Southwest, in response, said the application’s rollout required finding a way to integrate it into its system and making sure its pilots had the necessary support and training.
Southwest operates an all-Boeing fleet. It expects to receive just 20 planes this year, less than one-fourth of its original plans due to the planemaker’s safety crisis. The delays have left it overstaffed and forced it to defer the retirement of older and less-fuel-efficient jets, driving up its operating costs.
Moreover, delays in the FAA certification of Boeing’s MAX 7 aircraft, the smallest version of MAX planes, have compelled it to operate MAX 8 planes, which have more seats and are too big for some of Southwest’s markets.
Flying bigger planes also means more staffing. Analysts at Raymond James estimate Southwest’s full-time employees per aircraft will increase to 92 in 2023 from 78 in 2018.
SouthWest slashed its flights to and from Atlanta this week and asked hundreds of its workers to relocate. Analysts believe the airline needs to cut more flights across its network as an excess supply of seats in the domestic market dampens airfares, apart from diversifying its revenue sources.
The airline’s passenger volumes are running below pre-pandemic levels and shares have lost about 40% of their value in the past three years. It has downgraded its outlook at least eight times in the past 20 months despite booming travel demand and analysts expect profit in 2024 to plunge about 83% from a year ago.
Analysts and investors are also looking for a more precise timeline for the rollout of extra-legroom seats since the new cabin layout requires approvals from the FAA. The airline is also hard-pressed for new high-margin revenue streams as its costs have ballooned and are hurting profits.
The Road Ahead
The airline has now unveiled several initiatives, including partnerships, vacation packages for customers and aircraft sale-leasebacks. However, Elliott still reiterates its demand for Bob Jordan’s ouster, while not backing off from its intention of requesting a special shareholder meeting for the leadership overhaul.
Elliott has now accused the airline of having plans “filled with long-dated promises of better performance,” and called for “credible leadership,” while blaming Jordan for “playing with shareholders’ money.”
Bob Jordan, in reply, hit back by stating that his venture didn’t want a proxy fight with Elliott, but the activist investor has shown “little or no interest” in collaborating.
Photo Credit: Southwest Airlines