Activist Investor Takes Big Stake In Southwest Airlines

An activist investor has just taken a big stake in Southwest Airlines, and hopes to push for changes that will improve the carrier’s financial performance, including replacing the company’s management. The big question is what those changes would look like, as they almost certainly wouldn’t be good for consumers.

Investment firm takes $2 billion stake in Southwest

Elliott Investment Management has taken a nearly $2 billion stake in Southwest Airlines, meaning it now owns around 11% of outstanding shares of the airline. The firm plans to engage with the carrier’s management team, and push for changes that will help the underperforming airline, and boost shareholder returns.

More from OMAAT Southwest Airlines Considers Boeing 787 Order, Plans Long Haul Flights Read more

Elliott has published a letter intended for Southwest’s board of directors, so let me hit on a few of the highlights:

• “After 18 months of intensive research, we are convinced that Southwest represents the most compelling airline turnaround opportunity in the last two decades. The significant investment we have made reflects our conviction that, with the right leadership, Southwest can regain its status as an industry-leading airline.”
• “Southwest’s Executive Chairman and its CEO, who have spent a combined 74 years at the Company, have presided over a period of severe underperformance, and they have demonstrated that they are not up to the task of modernizing Southwest.”
• “We believe Southwest’s stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period. For the Company’s frontline employees who have a meaningful economic stake in Southwest’s success, we believe the plan would result in substantial incremental long-term value from additional profit-sharing payouts and appreciation of employee-owned stock.”

Southwest has historically been one of the best run airlines in the United States. It’s the largest airline in the United States never to file for bankruptcy (when factoring in predecessors of existing airlines), and it has historically been the US airline that has most consistently returned profits.

That being said, the company isn’t in the same position that it used to be, due to a variety of factors. The airline is dealing with higher costs, and slower growth due to Boeing 737 MAX delivery and certification issues. On top of that, in the past couple of years we’ve seen huge growth in premium and long haul demand, and that’s a market that Southwest can’t really tap into.

While Southwest’s stock is up today in response to this development, the company’s stock otherwise hasn’t been performing well, and it’s lower than it was in April 2020, weeks after the pandemic brought the aviation industry to a standstill.

This isn’t the first “activist investor” situation we’ve seen at a US airline recently. Earlier this year, Carl Icahn took a significant stake in JetBlue, with the goal of making changes at the airline. However, he significantly slashed his stake just weeks later.

What Southwest changes could Elliott be pushing for?

We know that Southwest Airlines is planning major changes to its business model. As Southwest CEO Bob Jordan explained during the Q1 2024 earnings call, the company is open to changing everything, with the exception of its baggage policy.

I recently wrote about some changes that were proposed by Southwest in a focus group, which would radically transform the company’s business model. This includes introducing basic economy with no ticket flexibility, adding assigned seats with fees, and much more. So one wonders if Elliott would be pushing for even more significant changes to the business model, or what?

For so long, Southwest has thrived by seemingly operating in a vacuum, and not paying attention to what the competition is doing. Southwest is a legitimately friendly airline, with no basic economy, two free checked bags, full ticket flexibility with vouchers that don’t expire, etc.

While I understand that people like Southwest because of these policies, is this really what’s maximizing revenue for the airline, especially in this environment? Costs are way up over time, and the “big three” global US carriers have adjusted their business model quite a bit, to become more competitive with Southwest. For example, pre-pandemic, Southwest had a huge advantage by not having change fees, but in the meantime, that’s the industry standard.

I would have to imagine that any activist investor would be pushing Southwest to unbundle its product even more, to greatly increase ancillary revenue. Obviously consumers wouldn’t like that, but I’m not necessarily sure it would be bad for Southwest’s bottom line.

Bottom line

Elliott Investment Management has taken a nearly $2 billion stake in Southwest Airlines, and is pushing for major changes at the airline, including a new management team. I’m curious to see how this plays out. Southwest is in a bit of a rut at the moment, though it seems like any major changes at the airline would shift the fundamental value proposition of the airline, and what separates it from the competition.

What do you make of this development at Southwest?