Activist investor Elliott Investment Management is calling out another North Texas company by acquiring a major stake to put pressure on leadership: Southwest Airlines.
Elliott Investment Management has nearly a $2 billion investment in the Dallas-based airline, one of the largest investors in the company with an 11% stake. The firm sent a letter to Southwest’s board on Monday.
The letter, signed by John Pike, partner of the firm and Bobby Xu, portfolio manager of the firm, says that the investor believes the airline has “poor execution” and leadership has a “stubborn unwillingness” to evolve the airline’s strategy, ultimate not creating good results for shareholders. In the first quarter, Southwest reported a $231 million loss.
The letter calls it a “decades-old approach” that goes hand in hand with old software, monetization strategies and operational processes. The letter even brings up the Dec. 2022 operational meltdown which stranded more than two million people and their belongings over the holidays. No executives were terminated for the meltdown, the letter reads.
Southwest was contacted by Elliott on Sunday, according to a spokesperson.
“We maintain an open dialogue with our shareholders and value their perspectives related to enhancing shareholder value,” a Southwest spokesperson said in an email. “...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.”
It specifically mentions Gary Kelly, executive chairman of the board and Bob Jordan, CEO of Southwest, who have a combined 74 years at the company and have “presided over a period of severe underperformance.”
In May, Elliott Investment Management wrote a letter to Dallas-based Texas Instruments stating the company was spending too much on massive capital projects and that “commitment to capital discipline will restore investors’ confidence.” Elliott’s investment is worth about 1.3% of that company’s market value.
The activist investment firm believes Southwest needs to step it up and gives three recommendations: enhance the board, upgrade leadership and undertake a business review.
Elliott Investment Management believes these changes could make Southwest stock $49 per share within 12 months, a 77% return during the period. The firm reported that the company’s share price has declined by over 50% in the past three years and has now fallen to even lower levels than it was traded in March 2020 at peak COVID-related shutdowns.
Researchers at Raymond James said it was “not surprised by activist interest” in Southwest.
“It is unclear if a management change is in the cards,” Raymond James researchers wrote. “Elliott is known for forcing changes that include management shake-ups and outright sales. There are some that believe sufficient change cannot occur without a change in leadership.”
Peter McNally, global sector lead for industrials materials and energy at Third Bridge said Southwest faces two big issues: the company’s IT system and the delivery of planes from Boeing.
Southwest lowered expectations from the plane maker, now expecting 20 Boeing 737 Max 8 aircraft deliveries in 2024, when it previously anticipated 46.
“Consolidation is likely off the table, for now, as the government scuttled the JetBlue-Spirit merger, sending a message to the industry that mergers are viewed unfavorably by this administration,” McNally said. “At least for the time being, it is hard to see what new strategy Southwest could pursue given that future growth is dependent on Boeing delivering more planes.”
The letter also reports that Jordan declined an opportunity to testify in front of Congress after the meltdown. In an interview with The Dallas Morning News in 2023, Jordan said he was traveling on the day of the congressional hearing and couldn’t make it.
“There’s a way you go about understanding what the hearing is about and who needs to show because of that — and they called Andrew,” Jordan said in the interview. “I was more than happy to go, but it was about our operational performance. He’s the expert. He’s our COO. Andrew was the right person to show.”
Melius Research called it “no easy fix” in their take on the letter. Southwest admitted the airline is looking to refine its product to improve returns, while American Airlines, Delta Air Lines and United Airlines are all bringing premium products driving above-trend revenue growth, Melius Research wrote.
“We believe that new leadership is required at Southwest,” the letter from Elliott Investment Management read. “While Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with a strategy that no longer succeeds in the modern airline industry ... As one of Southwest’s largest investors, we are committed to delivering the necessary leadership changes to achieve this goal.”
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