Southwest Airlines Faces Boardroom Shakeup by Elliott
Elliott Investment Management is making waves at Southwest Airlines by pushing for a major overhaul of the company's leadership. The hedge fund has proposed replacing 10 out of the 15 current directors, aiming to improve the airline's performance and leadership as its stock price has fallen by 24% over the past year.
Proposed Changes and Background
As part of a turnaround plan, Southwest has been trying to enhance its offerings by adding more legroom, introducing assigned seating, and recently appointing a new board member in July. Despite these efforts, the airline's performance has lagged, prompting activist investor Elliott to put forward a slate of new board nominees. These include former airline executives like David Cush, ex-CEO of Virgin America, and Robert Milton, former CEO of Air Canada.
The Stakes for Shareholders
Elliott's proposal offers shareholders a choice between the current board or one that promises "relevant expertise, fresh thinking, and accountability." Elliott has disclosed a 7% beneficial ownership in Southwest, nearing the 10% needed to call a special meeting. Including derivatives, Elliott holds an 11% interest.
Leadership Resistance and Strategic Moves
Southwest CEO Robert Jordan has noted the airline is already undergoing transformation efforts, though he criticized Elliott for not engaging in meaningful discussions. In response to the hedge fund's actions, Southwest adopted a shareholder rights plan, commonly known as a poison pill, to prevent any hostile takeover, which would activate if an investor’s stake exceeds 12.5%.
Financial Challenges and Market Conditions
Southwest anticipates a challenging third quarter, with unit revenue expected to be flat or down by 2% year-on-year. Non-fuel operating costs are projected to rise by 11-13%, exacerbated by delivery delays from Boeing. These issues have intensified cost pressures amidst an industry-wide overcapacity, affecting airfares negatively.
As the situation unfolds, stakeholders will be watching closely to see if Elliott's push can drive a turnaround in Southwest's fortunes, potentially setting a precedent for activist interventions in the airline industry.