Activist shareholder Elliott Investment Management (Elliott) has acquired a $1.9 billion value of shares in Southwest Airlines and now seeks to change the CEO of the carrier, that has struggled with operational and financial problems.
Elliott has highlighted significant concerns over Southwest’s current execution and the leadership’s reluctance to adapt its strategy, which has resulted in disappointing outcomes for shareholders, employees, and customers alike.
In the letter to Southwest’s board, the investment firm complained that Southwest’s stock price has dropped more than 50% in the last three years, dropping below the levels seen during the COVID-19 pandemic in March 2020.
As per Elliot, Southwest Airlines has failed to evolve, and has lost its competitiveness compared to other U.S. based carriers. Elliot also highlighted the Dallas-based carrier’s massive flight cancellations in December 2022 on what it described as the airline’s outdated software and operational processes.
“Poor execution and leadership’s stubborn unwillingness to evolve the Company’s strategy have led to deeply disappointing results for shareholders, employees and customers alike,” the investment firm said in the letter, dated Monday.
Southwest CEO Robert Jordan “has delivered unacceptable financial and operational performance quarter after quarter,” the letter read. It said Jordan and former CEO Gary Kelly, now the airline’s executive chairman, “are not up to the task of modernizing Southwest.”
Elliott is calling for executives from outside the company to replace Jordan and Kelly, and for “significant” changes on the board, including new independent directors with experience at other airlines.
As per Elliott, the financial underperformance has not been good on theprospects of frontline employees, costing each tens of thousands of dollars on average through reduced profit-sharing and declines in the value of employee-owned stock.
Southwest said it was contacted by Elliott on Sunday and looked forward “to better understanding their views on our company.”
“The Southwest Board of Directors is confident in our CEO and management’s ability to execute against the company’s strategic plan to drive long-term value for all shareholders, safely and reliably serve our customers and deliver on our commitments to all of our stakeholders,” a spokesperson said in a statement.
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Elliott believes that by implementing the Stronger Southwest plan, the company can reclaim its position as an industry leader, generating best-in-class margins and attractive returns for shareholders.
Citing its “Stronger Southwest” plan, Elliott has put forward a proposal with three key recommendations to increase the performance of the airline:
The investment firm projects that Southwest’s stock could reach $49 per share within 12 months, representing a 77% return during the period. Additionally, the plan would yield substantial long-term value for employees through increased profit-sharing payouts and appreciation of employee-owned stock.
Elliott's letter further added,
"The Stronger Southwest plan puts the Company on a path to more sustainable performance that will better serve customers, employees, and shareholders."
"The plan modernizes Southwest’s approach to ensure that its offering is aligned with customer preferences. It upgrades leadership to improve execution. It drives the efficiency required to continue offering low fares and it facilitates."
If you see the volumes, Southwest carries the most passengers within the United States with a robust domestic network, although Delta, United and American, all of which have more extensive international routes, are much larger by revenue.
Worth mentioning, Southwest was profitable for 47 straight years, a record, many would envy in the air travel business, until the great leveller Covid-19 pandemic hit in 2020, battering the businesses.
Southwest, with a fleet of exceeding 820 planes, reported a record revenue of $26.1 billion in the year 2023, but the $465 million profit was down from the previous two years and was about one-tenth of its competitor, Delta’s profit.
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