Elliott Pushes for Change at Southwest, Shares Up 8.4%

Key Takeaway

• Elliott Management has taken an 11% stake in Southwest Airlines, pushing for new leadership and strategic changes due to underperformance.
• Following Elliott's announcement, Southwest shares surged 8.4% to $30.08, reflecting investor optimism about potential improvements.
• Despite a strong brand and fleet, Southwest faces financial challenges including a $231 million Q1 net loss and delayed aircraft deliveries from Boeing.

Elliott Management's Activist Push

Activist investor Elliott Management has taken a significant $1.9 billion stake in Southwest Airlines, making it one of the airline's largest shareholders with an 11% ownership stake. Elliott is calling for sweeping changes in the airline's leadership, board composition, and overall strategy. The firm criticized Southwest's CEO Bob Jordan and Executive Chairman Gary Kelly for what it described as "unacceptable financial and operational performance quarter after quarter." Elliott's letter to Southwest's board highlighted the need for new leadership to address what it sees as years of underperformance and a "stubborn unwillingness to evolve the company’s strategy."

Elliott's letter stated, "Southwest’s executive chairman and its CEO, who have spent a combined 74 years at the company, have presided over a period of severe underperformance, and they have demonstrated that they are not up to the task of modernizing Southwest." The fund also pointed out that only one of Southwest’s eight most senior executives had experience at another airline, reinforcing what it called an "insular culture."

Financial and Operational Challenges

Southwest Airlines has faced several financial and operational challenges in recent years. The airline's share price closed at $27.25 on Friday, below its pre-pandemic level in March 2020. Following Elliott's announcement, the stock jumped 7% in morning trading to $29.80. Despite this, the airline has struggled to capitalize on robust travel demand, burdened by high costs and constraints on its growth. Labor expenses have increased due to new contracts negotiated since the pandemic, and the company has been affected by delayed aircraft deliveries from Boeing.

In the first quarter, Southwest posted a $231 million net loss and announced plans to cut 2,000 employees by the end of the year and drop service at four U.S. airports. The carrier also lowered its revenue growth expectations because Boeing is only delivering 20 of the 46 single-aisle jets it had pledged. Southwest's technology and monetization strategy have also been criticized as outdated, impacting its ability to compete with other carriers.

Market Reactions and Analyst Views

The market reacted positively to Elliott's announcement, with Southwest shares soaring as much as 8.4% to $30.08, the biggest intraday gain since March 2022. Savanthi Syth, an analyst at Raymond James, noted that Southwest's brand, fleet, and balance sheet with net cash of more than $11 billion make it "unique among U.S. airlines" and an unsurprising target for activist investors. "We are not surprised by activist interest in Southwest given the very strong franchise with valuable tangible and intangible assets," Syth said.

Despite its well-known brand and sizeable fleet, Southwest has struggled to capitalize on robust travel demand in recent years. The airline has also been reeling from a significant flight disruption in late 2022 that stranded millions of passengers over the holidays, costing the company nearly $1.2 billion. Elliott pointed out that the carrier's failure to sufficiently invest in its operations was a major issue.

Street Views

• Elliott Management (Bullish on Southwest Airlines):

  "We believe Southwest’s stock can achieve $49 per share within 12 months."

• Savanthi Syth, Raymond James (Cautiously Optimistic on Southwest Airlines):

  "Southwest’s brand, fleet and balance sheet with net cash of more than $11bn make it unique among US airlines... There aren’t structural changes that cannot be overcome with sufficient ‘shots on goal’ to drive margin recovery."