Activist has position of nearly $2 billion, plans to push for changes to boost lagging shares
Southwest’s share price has plunged by more than half in the past three years. Elliott Investment Management has built a stake of nearly $2 billion in Southwest Airlines LUV – 0.36% decrease; red down pointing triangle and plans to push for changes aimed at reversing the airline’s underperformance.
The activist is one of Southwest’s largest investors, according to people familiar with the matter.
Elliott plans to engage with the management team at Southwest, which has a market capitalization of $16.6 billion. Other details of Elliott’s plans couldn’t be learned.
The firm is known for taking on tech companies and others and forcing changes that include management shake-ups and outright sales. Several companies in which Elliott has recently built positions have ultimately replaced their CEOs, including the big wireless-tower owner Crown Castle, NRG Energy and Goodyear Tire & Rubber.
It is a critical moment for Southwest, which took flight as a scrappy Texas upstart in the 1970s and grew into the largest domestic airline by passengers. It was known for undercutting competitors’ fares and stimulating demand for air travel. The Dallas-based carrier kept costs low in part by flying one type of plane, the Boeing 737, and became a customer favorite known for exceptional service.
But the formula that generated 47 consecutive years of profits before the Covid-19 pandemic has shown signs of strain. The airline’s consumer-friendly reputation has also taken a hit, particularly after Southwest’s epic holiday meltdown in 2022 that was caused, in part, by technology systems that were unable to manage a disruption on that scale.
Southwest’s share price has plunged by more than half in the past three years. The stock closed Friday at $27.75, lower than where it traded in March of 2020, when the pandemic threw the travel industry into disarray.
Shares of Delta Air Lines are up roughly 8% over the past three years, while United Airlines is down just about 8%. The S&P 500 is up more than 30% during the same period.
Southwest executives have said they would take decisive action to break out of the financial malaise, including rethinking the airline’s unique boarding and seating setup. The airline currently doesn’t assign seats, and it doesn’t offer premium options that have helped its rivals’ results.
Southwest is grappling with lackluster earnings and profit margins that have lagged behind some competitors’ as it faces higher costs from new labor contracts. Delays in new aircraft deliveries from Boeing, part of the fallout from the midflight blowout of a door plug on an Alaska Airlines flight in January, have thwarted some of Southwest’s growth plans.
Southwest has been hit particularly hard by the plane maker’s woes, including slowed certification of the smaller version of the 737 MAX. The airline said in April that it expects to receive just 20 new Boeing jets this year, down from 79 total deliveries it had been anticipating in January.
In March, Southwest said it would re-evaluate its financial outlook, citing lower-than-expected deliveries of Boeing jets. Its shares fell 15%. A few weeks later, Southwest said it was ditching some airports in a rare move for the airline that backtracked on part of its network-expansion plans from a few years earlier.
Southwest’s recent poor performance has also taken a toll on employees, who participate in the company’s profit-sharing and retirement plans.
Following its winter-storm meltdown in late 2022, Southwest got hit with a civil penalty totaling $140 million after the U.S. Department of Transportation said the airline violated consumer-protection laws. (The agency said it was 30-times larger than any prior penalty for such violations.) Southwest spent much of last year trying to recover from the fiasco and earn back its customers’ trust.
Many of the company’s recent setbacks have taken place under the watch of Chief Executive Bob Jordan, who has been at the helm of Southwest since February 2022. He took over for Gary Kelly, who had been CEO for nearly 17 years and remains executive chairman.
Southwest still expects a strong summer. The company anticipates revenue will hit a quarterly record in the second three months of the year, but it is planning schedule cuts after the peak travel period passes.
Other discounters and airlines that focus on U.S. flying have also struggled this year. While appetite for travel remains high, competition has been fierce as the supply of airline seats has outpaced demand in some markets, weighing on fares.
JetBlue Airways attracted the attention of billionaire activist investor Carl Icahn, who struck a deal for two seats on the airline’s board after unveiling a big stake earlier this year.
Other recent Elliott investments include global tech investor SoftBank, chip maker Texas Instruments and Johnson Controls International, the air conditioning and building-security supplier.
The busy season for activist investors has largely died down after many public companies held their annual shareholder meetings earlier in the spring. The biggest fights so far this year included Nelson Peltz’s proxy battle at Disney, in which his firm Trian Partners failed to win two seats on the media giant’s board, and Ancora Holdings’ push at railroad operator Norfolk Southern, where it secured three seats.