Southwest Faces Activist Pressure as Elliott Takes Nearly $2 Billion Stake

Elliott Investment Management, an activist fund, has built a nearly $2 billion stake in Southwest Airlines, The Wall Street Journal reported — citing sources. 

The stake made Elliott one of Southwest’s largest investors. Southwest has a market cap of approximately $16.6 billion. The carrier did not immediately respond to a request for comment. 

Leadership Changes in the Cards for Southwest?

In a letter to Southwest’s board of directors, Elliott pushed for leadership changes.

“Southwest’s legacy necessitates evolution and change to regain industry leadership for its customers, employees and shareholders,” the letter read. “As one of Southwest’s largest investors, we are committed to delivering the necessary leadership changes to achieve this goal.”

The letter pointed to how CEO Bob Jordan failed to testify to Congress following Southwest’s 2022 holiday meltdown. Instead, chief operating officer Andrew Watterson testified. Elliott also took issue with how the majority of Southwest’s executive team has worked at the airline for an average of over 25 years.

“The mandate from the Board has been clear: Keep doing things the way they have always been done,” the letter from Elliott partner John Pike and portfolio manager Bobby Xu read.

In a presentation to carrier’s board, Elliott said it wanted significant changes to the board, “upgraded leadership” related to the chairman and CEO of the company, and a comprehensive business review of Southwest’s practices.

A Southwest spokesperson said the board had confidence in Jordan and the executive team.

“We were first contacted by Elliott yesterday and look forward to better understanding their views on our company,” the spokesperson told Skift. “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.”

Elliott Wants Southwest to Consider Bigger Changes — Including Baggage Fees

The presentation also said Southwest had “written off key commercial innovations and revenue opportunities,” related to assigned seating, premium products, basic economy and checked bag fees. Southwest currently does no assigned seating and only sells economy seats.

Southwest shares were up nearly 7% following the news. Elliott said it believed that with certain changes, Southwest’s shares could go up as much as $49 within 12 months. Southwest shares are currently set at around $30. United trades at $53 a share and Delta is at around $50 a share.

Elliott has built major stakes in other large companies like SoftBank, Texas Instruments and Johnson Controls. The firm has also invested in travel companies like Dean Hotels and Travelport. Multiple companies Elliott has invested in have seen their CEOs step down, including telecommunications giant Crown Castle and energy company NRG. 

JetBlue made headlines earlier in the year when activist investor Carl Icahn reported a 9.1% stake in the carrier, saying he believed its shares were undervalued in a regulatory filing. Icahn became the third-largest investor in JetBlue and won two seats on its board.

Southwest Underperforms so Far in 2024

Southwest, whose business model relies on open seating and boarding in an all-economy cabin, has not been profitable so far this year. Delivery delays with the Boeing 737 Max 7 and sustained demand for premium travel have hampered the carrier’s bottom line. 

The airline reported a first-quarter loss of $231 million compared to $159 million during the same time last year, which was slightly below Wall Street expectations and worse compared to its competitors. Southwest also exited four airports, a rare move for the carrier. 

More recently, Southwest executives have been mulling over major changes to its business model. Jordan discussed potentially implementing assigned seating and adding premium cabins to Southwest’s fleet. These changes would be some of the biggest in Southwest’s 57-year history. 

“We have transformed before, adding things like Wi-Fi, larger bins and in-seat power, and we will continue to adapt as needed,” he said during Southwest’s first-quarter earnings call.  

Jordan, however, has ruled out baggage fees. Airlines like American, JetBlue and United raised baggage fees this year, citing rising operating costs and inflation. Southwest lets customers check in two bags with no fees attached. 

Southwest has been rolling out changes, including a partnership with Google Flights. For years, Southwest resisted displaying its fares on online travel agencies and search platforms like Google Flights to cut distribution costs and build customer loyalty.