Activist Fund Pushes For Change At Southwest, As Newest Large Investor

An activist fund that is now one of Southwest Airlines’ largest investors is pushing for new leadership at the Dallas-based carrier’s Board and C-suite level, change it deems necessary for the airline to better compete and improve its performance.

A $1.9 billion investment was publicly disclosed by Elliott Investment Management L.P. on June 10, releasing a letter to the airline’s board of directors alongside a 51-page presentation outlining the company’s vision. Describing the carrier’s Executive Chairman and CEO as having “presided over a period of severe underperformance,” the fund said Southwest is “the most compelling airline turnaround opportunity in the last two decades,” and retains “the fundamental attributes necessary to restore its industry-leading position.”

With new management in place, the carrier would next need to conduct a comprehensive business review, the investment group said, closely examining Southwest’s operations with fresh perspective. Together, Southwest CEO Bob Jordan and Executive Chairman Gary Kelly have spent a combined 74 years at the company, the fund notes.

A current growth strategy focused on capacity expansion rather than on product innovation “appears to have driven substantial unnecessary losses” at Southwest, the fund says, calling recent airline initiatives “incrementalism,” and not enough to drive transformation.

“We look forward to collaborating with Southwest to restore accountability and best-in-class financial performance,” Elliott’s letter to the airline Board concludes.

In response, Southwest said it was first contacted by Elliott on June 9, and “look[s] forward to better understanding their views on our company.”

Noting Board confidence in its CEO and management’s ability to execute and drive long-term value, an airline spokesperson said, “We maintain an open dialogue with our shareholders and value their perspectives.”

Southwest returned to a post-pandemic profit of $977 million in 2021, a figure that has declined year by year. In 2022, it reported net profit of $539 million, slipping to $498 million for full year 2023. In the most recent quarter ended March 31, the airline posted a net loss of $231 million, widened from a $159 million net loss in the first quarter of 2023.

Southwest is facing cost pressure from higher labor and maintenance expenses as it contends with Boeing delivery delays that have prompted capacity cuts and a hiring freeze. The airline is making network adjustments, tightening aircraft turn times, and planning for future red-eye flying, as it works to bolster revenues. It is also in the midst of cabin modifications featuring larger bins, in-seat power, and an overhaul of its Wi-Fi product.

Elliott’s investment followed 18 months of “intensive research,” the company said, a timeline that appears to date back to the carrier’s December 2022 meltdown. In listing its positive attributes, the fund notes Southwest’s cost-efficient single fleet type, lucrative loyalty program, dominant market share and unlevered balance sheet.

“We believe Southwest’s stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period,” the letter to Southwest’s board states.

Scrutiny of the airline’s Board is “long overdue,” the Swelbar-Zhong Consultancy states in an analysis, pointing to underperformance and cost issues predating recent labor contracts.

“This is an action that should have been taken even before the pandemic,” writes William Swelbar, the consultancy’s chief industry analyst, in reaction to the fund’s investment. Short-term fixes, he projects, will be revenue-focused measures such as charging for seats and bags—changes he expects will take time, hampered by the airline’s current technology.

“The problems at Southwest run much deeper than fleet,” Swelbar says. “I can easily argue that Boeing is doing them a favor by limiting the number of seats they can deploy profitably. The network is broken—even more than other ULCCs.”

However, he notes, “What they have that gives the company—and any change agent—time, is a balance sheet with ample liquidity.”