When Elliott Management acquired an 11% position in Southwest earlier this week, the activist investor placed the airline’s management in the crosshairs. With a history of forcing management changes at companies it targets, Elliott acquired $1.9 billion in Southwest stock as of June 10. The call for the dismissal of CEO Bob Jordan and chairman Gary Kelly has set the stage for a showdown between the hedge fund and the current leadership of Southwest.
Southwest, however, seems prepared to fight back. CEO Bob Jordan has made it clear that he will not resign in response to Elliott’s demands. The airline’s board of directors has shown confidence in the current leadership team’s ability to drive long-term value for all shareholders. Southwest has successfully weathered challenges in the past and believes in its strategy moving forward.
The Potential Turnaround
Elliott Management sees Southwest as a compelling turnaround opportunity in the airline industry. Despite losing ground to competitors since 2020, the hedge fund recognizes Southwest’s strong brand, fleet, network, and cash position. Elliott’s bold prediction of driving Southwest shares to $49 within the next year signals confidence in the airline’s potential growth. The call for a comprehensive business review and the appointment of independent board members with outside airline experience underscores Elliott’s commitment to shaping Southwest’s future direction.
Observers of the U.S. airline industry are not surprised by the activist interest in Southwest. The airline’s valuable assets, including brand loyalty, fleet strength, and financial position, make it an attractive target for potential change. The industry’s increasing focus on premium flyers and ancillary sales has created a unique challenge for Southwest, which has maintained a distinct approach to the market.
Elliott’s criticism of Southwest’s dated technology and operational performance during the 2022 holiday season highlights areas for improvement. Southwest’s response includes increased IT investment to address tech shortfalls and improve operational efficiency. The airline’s recent actions to enhance flight completion rates and adjust capacity plans demonstrate a commitment to overcoming operational challenges.
CEO Bob Jordan’s recognition of evolving customer needs and potential changes to Southwest’s seating model reflect a willingness to adapt to market dynamics. The consideration of assigned seating, basic economy fare options, and premium seat configurations signals a shift towards meeting customer demands. Southwest’s unique selling point of free checked bags may undergo evaluation in light of changing market trends and revenue opportunities.
The Future Outlook
As Southwest navigates the demands of activist investors and industry dynamics, the airline faces a critical juncture in its strategic evolution. The potential for leadership changes, operational enhancements, and customer-centric initiatives could shape Southwest’s trajectory in the competitive airline landscape. While the road ahead may be challenging, Southwest’s ability to innovate and respond to market forces will determine its success in the evolving aviation industry.