It’s a challenging time at Southwest Airlines. The airline isn’t performing as well financially as it used to, though things are quickly changing.
For one, an activist investor took a major stake in Southwest, and is calling for radical changes at the airline. At the same time, the current management team is working on making updates to the business model to increase revenue, from introducing assigned and extra legroom seating, to adding redeye flights to the schedule, to reducing turn times.
We know that Elliott Investment Management (Southwest’s new activist investor) has been calling on major management changes at the airline. We’re now starting to see the first of that become a reality…
In this post:
Southwest making major changes to its Board
It has just been announced that Southwest Airlines Executive Chairman Gary Kelly will be stepping down after the company’s 2025 Annual Meeting. Gary Kelly has been at Southwest for 38 years, and served as CEO of the airline from 2004 to 2022, so he was in that role for 18 years. He has also served as Chairman of the company since 2008, when Southwest founder Herb Kelleher retired.
On top of Kelly leaving the airline, six current Directors have informed the Board of their plans to voluntarily step down immediately after the regularly scheduled Board meeting this November.
The Board anticipates appointing four new independent Directors in the near future. In addition to considering Elliott’s Director candidates, the Nominating and Corporate Governance Committee has engaged an independent search firm to identify and review candidates who can bring complementary skills and experience to lead the airline forward.
Southwest highlights how after these changes take place, the average tenure of the Board will be decreasing drastically. 75% of the company’s Directors will have three years or less tenure on the Board, and the average Board tenure will be reduced from 7.3 years to 2.5 years.
Usually a company wouldn’t necessarily promote the lack of tenure as a good thing, but the strategy here seems pretty intentional. Elliott Management wants big changes at the company, and presumably the goal is to highlight how a Board with less tenure might be more open to changing things.
Gary Kelly expresses confidence in Bob Jordan
Gary Kelly has written a letter to shareholders of the company, explaining the logic behind his retirement. His decision to step down at the airline follows a meeting with Elliott Management in New York on Monday, with the objective to “meet, in person, and commence a productive dialogue.” Kelly calls the dialogue productive, even though it ultimately ended with him announcing his retirement.
It very much seems like Kelly is sacrificing himself, in hopes of Southwest Airlines CEO Bob Jordan being able to keep his role. The primary message of Kelly’s letter is how he has no issues with a refresh of the Board, but emphasizes that the entire Board has faith in Jordan’s ability to lead the carrier.Here’s how Kelly describes Jordan:
The Board and leadership of Southwest unanimously support Bob Jordan as CEO. Bob has a proven track record over decades and, most importantly, he has what it takes to lead Southwest through a significant transformation and usher in a new era of profitable growth, innovation, and industry leadership. Bob is a hands-on, detailed, and insightful thinker with a deep knowledge of this complex industry and business. More importantly, he understands Southwest, our Culture, and our unique brand.
Only time will tell how this plays out. Elliott Management has been trying to push for both Kelly and Jordan to leave the airline, and it looked increasingly likely that they’d be able to force this. Clearly Kelly took one for the team, and realized he’d probably be gone soon enough anyway if he didn’t leave voluntarily.
We’ll see if Kelly leaving the company is enough for Jordan to keep his job, or if Elliott Management is going to try to get rid of him as well. Personally I wouldn’t be surprised if Elliott Management still finds a way to force Jordan out.
Bottom line
Southwest Airlines Executive Chairman Gary Kelly is stepping down, after nearly four decades at the airline. This follows Elliott Management taking a stake in the company, and trying to overhaul the management team. Elliott Management has been trying to get rid of both Kelly and Jordan, so Kelly is now leaving voluntarily(ish), but is expressing support for Jordan.
What do you make of this Southwest management shakeup?
I'm not an airline expert but I've flown lots of miles on lots of planes. The truth is that SW's business model (lots of direct flights intra-California, flexible changes, open seating with the ability to jump on a flight at the last minute and board after the A group) has worked well for me and after their changes they will just be another standard airline and no longer my first choice, exactly because their FF...
I'm not an airline expert but I've flown lots of miles on lots of planes. The truth is that SW's business model (lots of direct flights intra-California, flexible changes, open seating with the ability to jump on a flight at the last minute and board after the A group) has worked well for me and after their changes they will just be another standard airline and no longer my first choice, exactly because their FF program and other amenities are so weak. I'm on 100 of their flights a year and that will drop to maybe dozens. I guess they figure they will make it up with Spirit Airlines customers, or something.
This is one step closer to paid checked bags.
Apparently, that is what they are discussing. However, in my opinion, that will ruin the airline since "bags fly free" is such a part of the airline's identity.
I don't know how much the free bag thing matters. There are lots of ways to get free bags, mostly notably by just having the right credit card.
Elliot only controls 10% of WN. The issue is LUV's stock has been stuck for years as the S&P 500 has continued to appreciate. It is the other 90% of shareholders that also want to see a return on their investment. If Southwest's stock price was appreciating, Elliot would have no leverage. I dont fault investors who have taken losses while FAs, pilots, and management got record breaking raises to now demand change.
The only three words that matter in Elliott's investor presentation are "unlevered balance sheet." Their agenda is to load Southwest up with debt, do a share buyback, and sell their shares for a quick profit. In effect, it's just asset stripping by corporate raiders. Southwest executives are likely happy to go along with it because they'll handsomely profit themselves, but the airline is probably sunk as a company. This, in a nutshell, is how the...
The only three words that matter in Elliott's investor presentation are "unlevered balance sheet." Their agenda is to load Southwest up with debt, do a share buyback, and sell their shares for a quick profit. In effect, it's just asset stripping by corporate raiders. Southwest executives are likely happy to go along with it because they'll handsomely profit themselves, but the airline is probably sunk as a company. This, in a nutshell, is how the United States of America is managed, and we're all the poorer for it.
sunk, no.
but anyone that doesn't think that WN will pay a very high price for letting its stock price fall so far for so long is new to business.
It's also notably how many board members and execs have bailed or will bail rather than have their name associated w/ the carnage that will be WN.
Let's not forget how much of the US airline industry is in poor or deteriorating financial shape......
sunk, no.
but anyone that doesn't think that WN will pay a very high price for letting its stock price fall so far for so long is new to business.
It's also notably how many board members and execs have bailed or will bail rather than have their name associated w/ the carnage that will be WN.
Let's not forget how much of the US airline industry is in poor or deteriorating financial shape... AA, B6, F9, NK..... you will have DL and UA able to control their destinies and the rest of the industry will either be at the mercy of or under the control of corporate raiders...
the next few years could be the saddest on record for the US aviation industry...
The only salvation (if there is one) is that WN has settled w/ all of its labor groups so it will be very hard for Elliott to do much to them.
just about everything else, though...
They need to get rid of Kelly before they can fire Jordan.
Let's be clear, they will be doing exactly what Icahn did with TWA.
How they secretly do it is to be seen.
Some analysts thought that LUV had turned the corner before this. But I think that Tim Dunn is right in that that the next fews years are likely going be very difficult for a lot of airlines.
The Elliott Management website says that they are experts "without limitation: equity-oriented, private equity and private credit, distressed securities, non-distressed debt, hedge/arbitrage, real estate-related securities, commodities trading and portfolio volatility protection." And Elliott has a long history...
Some analysts thought that LUV had turned the corner before this. But I think that Tim Dunn is right in that that the next fews years are likely going be very difficult for a lot of airlines.
The Elliott Management website says that they are experts "without limitation: equity-oriented, private equity and private credit, distressed securities, non-distressed debt, hedge/arbitrage, real estate-related securities, commodities trading and portfolio volatility protection." And Elliott has a long history of squeezing companies undergoing challenges in industry conditions (AthenaHealth, Cubic, LogMeIn, Barnes & Noble, Travelport, and Gigamon are examples).
Judging by Elliott bringing in Robert Fornaro, former CEO of Spirit Airlines and AirTran Airways, as a "consultant", Elliott may think that LUV will become a deep discount airline, and this will likely send more waves through the aviation industry. They probably think they can pull it off - but thier expertise does not convince me.
I think running an airline is a very, very complicated business with lots of very smart competitors, fickle customers and narrow margins.
Based on Elliott's expertise, I will not be touching this stock dispite the bounce that sometimes occurs when you ride a deal like this. And I'll definitely never fly them again.
Sad news that would never happen if Herb Kelleher Attorney Founder of Southwest Airlines were alive as he would not have let this happen to his Southwest Airlines!
Other than trick Elon Musk into buying the company at several times its value, exactly what do you think Herb could've done?
There isn't any room in our economy for a consistently profitable company that delivers a good product. We're going to see Southwest go the way of Boeing. They'll cut the product to the bone, alienate the customers, raid the balance sheet to pump up the stock price, then sell their stake before facing any of the consequences.
This mindset is going to be the downfall of the United States economic leadership. We can't keep going...
There isn't any room in our economy for a consistently profitable company that delivers a good product. We're going to see Southwest go the way of Boeing. They'll cut the product to the bone, alienate the customers, raid the balance sheet to pump up the stock price, then sell their stake before facing any of the consequences.
This mindset is going to be the downfall of the United States economic leadership. We can't keep going like this. I don't know what laws need to be passed to stop it but it's becoming an existential problem. It's literally killing people in the case of Boeing.
Problem is, that level of vulture-capitalism took hold in the 1960s, and then was sent into near religious-level turbo boost, in the 1980s via the Reagan administration. At this point, it may be so inextricably linked to American business culture, that even a shock like 2008 can't set us back on a more sustainable pathway.
So, if Elliott's people get on the board you'll quickly see WN become far less customer friendly. Elliott is the kind of wall street banker entity that everyone not in New York or DC loves to hate. And we have a ringside seat that will enable us to see why entities like this suck.
"Customer friendly" doesn't cut it. A public company is responsible for the shareholders. Sure good customer service can help drive that but if a company doesn't change with the times and maximize revenue they will be subject to shareholder pressure (as they should be).
This is a business, not a charity. If you like how they run things now buy the airline and nothing will have to change
this is huge and it confirms that Elliott is forcing change just as Icahn is at B6. Even investors recognize there is intrinsic value in airlines; WN was long the most valuable airline in the world, then went back and forth with DL for that title, and now has fallen to about 60% of DL's value but regained the #2 spot among US carriers after UA briefly took the #2 US airline title. (Ryanair is...
this is huge and it confirms that Elliott is forcing change just as Icahn is at B6. Even investors recognize there is intrinsic value in airlines; WN was long the most valuable airline in the world, then went back and forth with DL for that title, and now has fallen to about 60% of DL's value but regained the #2 spot among US carriers after UA briefly took the #2 US airline title. (Ryanair is still the 2nd most valuable global airline behind DL)
Whether Elliott can do anything really better remains to be seen but having a board presence means they will know what parts of WN lose money.
I still believe that WN is being hurt far more by delays in delivering the MAX 7 jet than any other factor but they have been very slow to adapt to changing travel patterns including an end to the one-size-fits-all customer service strategy upon which WN was built.
You really can't help yourself mentioning Delta even when the article is about Southwest...I blame myself for reading a post made by Tim Dunn thinking this would be different
it is highly relevant. WN WAS the most profitable and highest market cap airline for years.
Elliott, quite frankly, can and does look at what other airlines have done... you have looked at Elliott's investor presentations and they CONSISTENTLY rank WN on one of the big 4 (the bottom) and DL at the top?
My guess is that if the regulatory environment is right Southwest will merge with one of the US3 and it's at one time "unique" business model with be no more.
with what happened with the jetblue and spirit merger attempt, I think the regulatory environment would need to change a lot for this to happen.
The regulatory environment would need to be non-existent for something like that to occur. I believe Southwest is the largest domestic airline and merging with one of the US3 would create a HUGE powerhouse. I can't see any administration letting that take place, regardless of party.