Southwest Airlines has recently implemented a one-year rights plan, often referred to as a poison pill, in response to activist investment firm Elliott Management’s acquisition of $1.9 billion worth of Southwest shares, representing 11% ownership in the company. The move aims to prevent Elliott from increasing its stake further and potentially influencing management changes within Southwest.
Details of the Rights Plan
Under the rights plan, if a single shareholder surpasses ownership of 12.5% of Southwest common stock, all other shareholders will have the opportunity to purchase additional shares at a 50% discount. Alternatively, Southwest could issue additional shares to dilute the influence of the acquiring entity. This defensive measure was taken due to Elliott’s regulatory filings indicating a possible increase in ownership starting July 11, although the hedge fund’s full position remains undisclosed.
Elliott Management’s plan for Southwest includes the immediate removal of CEO Bob Jordan, the appointment of new independent board members with airline experience, the hiring of a new CEO, and the replacement of current chairman Gary Kelly. Additionally, Elliott recommends a thorough business review to enhance Southwest’s profitability and operational efficiency. Despite these suggestions, Jordan refuses to step down, and the Southwest board stands by current leadership.
Southwest’s Current Challenges
Southwest Airlines has faced disappointing financial results in recent years, going from leading profit margins among major U.S. carriers in 2018 to lagging behind industry peers like Delta, United, and American in 2021. The airline’s stock price remains significantly lower than pre-pandemic levels, prompting the need for strategic changes to regain market competitiveness.
To address its declining performance, Southwest has initiated an operational action plan and increased investment in IT infrastructure to overcome technological deficiencies. The carrier has also revised its capacity plans and hinted at potential modifications to its unique seating model and cabin configurations, aiming to enhance revenue opportunities through ancillary services.
Southwest Airlines’ decision to implement a rights plan reflects its commitment to defending against potential interference from activist investors like Elliott Management. As the airline navigates through a period of operational challenges and intensified competition, strategic adjustments and proactive measures are crucial in securing its long-term sustainability and profitability in the aviation industry.