June 26, 2024
The Motivations of Elliott
This morning, Southwest Airlines filed a Form 8-K to update investors regarding their guidance for the second quarter. RASM (revenue per available seat mile) was a disappointment as the Company amended their guidance to down 4.0% to 4.5% from their previous guidance of down 1.5% to 3.5%. The downward revision may give Elliott’s call for change additional credence in the minds of investors.
Your SWAPA executive team and Negotiating Committee Chair participated in a Company update hosted by Southwest Airlines’ CEO Bob Jordan this afternoon. Labor leaders from across the airline were invited to participate in this web-only event via Microsoft Teams. SWAPA learned the following… nothing. Now is not the time to be flippant, but there is truly no other word to describe the call. We learned very little about Southwest’s ability to arrest the eighth guidance reduction within 18 months as reported in today’s Form 8-K, nor the ability to fend off the very real threat that Elliott poses.
Last week, SWAPA also met with Elliott Investment Management in person. We simply can’t ignore the fact that Elliott is here or their track record of replacing BOD members and executive leadership in companies they target, which was the reason for the dialogue. Elliott has made a significant investment in Southwest Airlines for one purpose: to make their investors money. SWAPA is very attuned to that fact. Elliott is not here to enhance the lives of employees or continue Herb’s legacy – they instead see a Company with a fortress balance sheet that is undervalued from a share price perspective due to factors that they think they can fix.
The purpose of our meeting with Elliott last week was to dissect their 51-page slide deck, dig into their business assumptions, and assess the depth and breadth of their understanding of the business and how Southwest is different from other airlines. We also wanted to determine their next steps and how those steps could impact our Pilots’ careers over the next one, five, and 10 years.
Elliott started looking at Southwest 18 months ago, right after the December 2022 operational meltdown when the Company stranded an estimated 2 million customers during the holiday season with more than 16,700 canceled flights. Since the meltdown, Southwest has continued to underperform from an investor perspective. This can be summed up by making one simple comparison with Delta Airlines and evaluating the change in market capitalization between the two carriers.
The data shows Delta’s market cap increased by $10.9 billion over the period of December 21, 2022, to June 7, 2024, and SWA’s market cap decreased by $5.2 billion, representing a $16.1 billion difference in market cap change between the two carriers. Elliott thinks they can grow SWA’s share price to $49 per share, which would represent an increase of $12.7 billion in SWA’s market cap from its June 7, 2024, close.
This is why Elliott is here; they see a turnaround story with an opportunity to make money. They believe they can fix the airline by replacing some of the BOD, making changes to executive leadership, and utilizing a fortress balance sheet to help reverse course and improve operating results. Elliott believes they can charge for bags and assigned seats, segment the cabin, further optimize the network, cut some operating expenses, and grow earnings, all resulting in an opportunity to boost market cap by billions of dollars before they move on to their next investment. But the billion-dollar question is, what will happen to employees in the wake of their changes?
Our greatest risk if Elliott is successful is the executive team that they place into the C-suite. Can they deliver significantly better operating results than the current team, and if they make network cuts, how deep do they go to generate the returns Elliott is looking for? These decisions could directly impact Pilot jobs. Elliott is not interested in running an airline. They are interested in finding a talented executive team that can, one that will grow earnings and generate strong free cash flow, and by doing so reward them with a solid return on their investment. Regardless of what team resides in the C-suite, the changes needed will take time to implement and could negatively impact employees.
At the end of the day, our membership wants a management team that can grow the airline and create new Pilot jobs, generate strong profits to support industry-leading labor agreements, and further enhance our compensation with healthy profit-sharing contributions. We will continue to follow developments between Elliott and Southwest and act in the best interests of our membership. SWAPA has a duty to protect Pilot careers, from the 23-year-old new hire with 42 years remaining at the Company to the 64-year-old approaching retirement.
Casey Murray, President
Tom Nekouei, Vice President
Hank Ketchum, 2nd Vice President