Activist Investor Takes Big Stake In Southwest Airlines

Activist Investor Takes Big Stake In Southwest Airlines

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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.

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.

Southwest is struggling with slow growth

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.

Southwest’s stock isn’t performing well

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.

Could Southwest unbundle its product?

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?

Conversations (30)
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  1. bridarshy New Member

    This is where everyone learns they added themselves to Google flights as a prequel to removing 2 free checked bags. ✔️

  2. iamhere Guest

    If you start to redesign their aircraft layout and if you start charging for fees for their services then how are they different from other airlines - they become just like them...

  3. frrp Diamond

    Why does 'activist investor' always sound more like 'asshole investor'?

  4. Bob Guest

    Guarantee the first thing to go is free checked bag considering the ridiculous amount of money the other airlines have made from it. When they swoop in they will want as much profit as possible wherever they can get it, future customer lost be damned because they have to appeal to investors that they did something financially good. I can't tell you how many times I've been in companies where it was taken over and...

    Guarantee the first thing to go is free checked bag considering the ridiculous amount of money the other airlines have made from it. When they swoop in they will want as much profit as possible wherever they can get it, future customer lost be damned because they have to appeal to investors that they did something financially good. I can't tell you how many times I've been in companies where it was taken over and hacked to bits in the first year and then the people responsible high tail it out to the next company to do the exact same thing elsewhere.

    1. CEblue New Member

      I'm tired of all the greed going on with these activist investors. I't's nothing about what's good for the consumer.

  5. RLS Guest

    European-style business class up front with the middle seat blocked is low investment and would be great for high yield business traveler and premium leisure traveler revenue.

  6. Paper Boarding Pass Guest

    SW is in its senior year, yet it acts like a first year freshman. Even Frontier and Spirit have moved up the maturity cycle, but SW hangs on to the "fun times" mindset and is falling way behind.
    My suggestions:
    - Business Class on the 1st two or three rows with extra leg room with complementary beverages and extra snacks. This brings in premium revenue which flows to both the top and bottom...

    SW is in its senior year, yet it acts like a first year freshman. Even Frontier and Spirit have moved up the maturity cycle, but SW hangs on to the "fun times" mindset and is falling way behind.
    My suggestions:
    - Business Class on the 1st two or three rows with extra leg room with complementary beverages and extra snacks. This brings in premium revenue which flows to both the top and bottom lines
    - Assigned seats for ALL....none of this "reserved seat" BS which I have personally challenged on my most recent SW flight to the chagrin of my new seat mates. Also cuts down on the "Jesus Jetway" phenonema. Charge for the seats accordingly (exit rows, front to back, business, last minute purchase, etc).
    - Maintain the direct flight formula which business PAX prefer over the hub & spoke
    - Drop from two free bags to one. Passengers need to appreciate small mercies.
    - Red eye flights if you must, but only between focus cities and business centers. No need to link Boise with FLL at 3:30 am.
    - I get this feeling SW is running off an IBM 370, COBOL software, & T3 connections (you get the picture). It had to hire an outside agent (GE) to fix the December 2022 scheduling software fiasco. Time to bite the bullet, ditch the tape drives, buy a "shrink wrap" software package, move up to the Z, and start assigning seats on boarding passes. IT will feel better about itself in the morning!

    1. Paper Boarding Pass Guest

      Also, when Icahn attempted the takeover of JetBlue earlier this year, his two candidates for the BOD had "no voting rights" as per an agreement forced by Ms Joanna who is an attorney by trade.

      Maybe B6 can fax a copy over to SW for review!!

    2. BradStPete Diamond

      I could'nt agree more !

  7. nikdro Guest

    Activist investors are never good for the customer. Their goal is simply to raise the stock price, typically by cutting costs and making employees less happy and raising prices.

    1. Retired Gambler Guest

      Disagree - in this case SW needs a kick in the behind. They need assigned seats, extra legroom seats etc in order to both generate better revenue and also offer a higher quality product. The recent increase in Early Bird fees is dumb. I've flown SW maybe 3 times in the last couple of years (flew them frequently when lived in Nashville in early 2000s due to having non-stop flights) and either bought Early Bird...

      Disagree - in this case SW needs a kick in the behind. They need assigned seats, extra legroom seats etc in order to both generate better revenue and also offer a higher quality product. The recent increase in Early Bird fees is dumb. I've flown SW maybe 3 times in the last couple of years (flew them frequently when lived in Nashville in early 2000s due to having non-stop flights) and either bought Early Bird or status matched to A List which includes Early Bird. Only ONCE was I in group A (toward the back). With the abuse of preboarding, sham seat saving and fact they allow so many to board between groups A and B if I actually paid for Early Bird and got stuck in group B I would be ticked. Assigned seats (which will allow them to charge for more premium ones) is the only option. You may consider that bad for consumers but I think it actually would improve the experience for many.

      As for private equity and hedge funds - I've worked with a few and agree they typically load companies with debt and cut costs. However, some costs can be cut without impacting customers. Also, SW has union agreements which would restrict the ability to cut non-management positions. As for employees being "less happy" I could care less - deliver a product I want to buy is all I ask. Isn't my job to worry about employee's happiness.

    2. Mark Guest

      Disagree. Unhappy employees rarely deliver a first rate experience. Your employees are WAS more valuable than your customers. IF you have good employees, they will take care of your customers.

  8. NedsKid Diamond

    Those of us who were bought by WN and told "drink the Koolaid" (and boy did I take pleasure in explaining that reference with photos of bodies lined up in Guyana to them) are loving this. So much what it looked like from inside WN... insular, we know best attitude. There is a magnificent powerful brand there with very high recognition, a lot of assets, a pretty good route network (for the size planes they have)... they just don't execute it well.

  9. ed lewis Guest

    They are still well run; the past CEO prioritized quarterly numbers over long term investment....example: decades behind the times IT capability. That will take time, those solutions are not a big bang. The under investment is showing. The problem with "activist investors" is they want to blow things up; i'm not sure that is the solution for WN.

    1. ImmortalSynn Guest

      "example: decades behind the times IT capability. That will take time,"

      Southwest went to full Amadeus back in 2017. They've had the I.T. capability to run a modern operation for many years now. Labor agreements and internally-imposed policy are what have held them back since then. Not I.T.

  10. Fordamist LeDearn Guest

    I think is was the mid-80’s, hostile-takeovers were all the rage, somebody unexpected, doesn’t seem probable, I recall Korean Air, showed up in Herb Kelleher’s office, told him they were planning to buy enough SW stock to take it over. Herb laughed about it later, typical Herb, “I threw a stem-winding fit, hollering, pounding my desk, “I built this airline, don’t you think I know how to tear it apart before you get it, so...

    I think is was the mid-80’s, hostile-takeovers were all the rage, somebody unexpected, doesn’t seem probable, I recall Korean Air, showed up in Herb Kelleher’s office, told him they were planning to buy enough SW stock to take it over. Herb laughed about it later, typical Herb, “I threw a stem-winding fit, hollering, pounding my desk, “I built this airline, don’t you think I know how to tear it apart before you get it, so it’s not worth a damn thing … and I’ll start the day you get enough stock to have to report to SEC!” Swore, man literally ran from his office, down the hall … “Maybe he’ll spread the word to anybody else with big ideas!”

  11. Never In Doubt Guest

    Southwest has been living off the "Herb Kelleher had a well run airline" history for a while without recently being a well run airline.

    1. DCAWABN Guest

      And beyond that, they have a large customer base of infrequent fliers that continue to think they live in the age when SW *was* the cheapest fare most often. So, the early-90s to early 2000s. SW hasn't been cheaper in a long, LONG while. They're great at point-to-point flights, which some people absolutely love, but otherwise SW benefits from consumer ignorance and SW has been resting on that for a while and charging the same...

      And beyond that, they have a large customer base of infrequent fliers that continue to think they live in the age when SW *was* the cheapest fare most often. So, the early-90s to early 2000s. SW hasn't been cheaper in a long, LONG while. They're great at point-to-point flights, which some people absolutely love, but otherwise SW benefits from consumer ignorance and SW has been resting on that for a while and charging the same as - or more - than legacy airlines for a subjectively subpar product (depending on what you're looking for).

    2. snic Diamond

      I doubt consumers are that dumb. When you add in the cost of checked bags, Southwest is often competitive. And as you point out, if WN is flying non-stop to where you want to go and all the others require stops in a hub, most people will choose the non-stop - even if it's priced a bit more. Finally, WN dominates some markets with multiple flights per day whereas the competition has only one or none. So frequent fliers can get locked in to WN.

    3. ImmortalSynn Guest

      "I doubt consumers are that dumb."

      Not sure why. Because they certainly are.

    4. Mark Guest

      Southwest is still cheaper on many, many ruotes. I'm a tour operator and trust me, their fares are consistently lower, and they are easier to work with. They are also way more responsive when the going gets tough on a particular day. I would love to see reserved seating, even if it's a paid for product.

  12. betterbub Diamond

    The answer is to sue Boeing for an ungodly amount of money, win, then live off that until Spirit, Frontier, and JetBlue drown and the market consolidates itself.

    Someone give me an honorary MBA pls

  13. Tim Dunn Diamond

    Trading on the NYSE just opened and LUV is up 7% compared to slightly down for most indices and other airlines.

    LUV has enough assets and has been well-run for long enough that it was set to turn around one way or another.

    They already have a plan to turn things around - although they have moved slow to figure out alternatives to Boeing's delays and implement it - or an activist investor would jump...

    Trading on the NYSE just opened and LUV is up 7% compared to slightly down for most indices and other airlines.

    LUV has enough assets and has been well-run for long enough that it was set to turn around one way or another.

    They already have a plan to turn things around - although they have moved slow to figure out alternatives to Boeing's delays and implement it - or an activist investor would jump in and try to make money.

    This isn't much different from what is happening with JBLU but it does say that there is deep value in airlines and it will come out one way or another.

    1. NedsKid Diamond

      I think there is and always will be deep value in airlines. At least until we all get personal jet packs or somebody renders the airplane obsolete.

      The presentation on the strongersouthwest.com site is interesting. Of course it has an agenda and there's a few things where meaning is slanted different than it was originally intended and obviously selective in which metrics used in comparison, but it does show a very clear picture of...

      I think there is and always will be deep value in airlines. At least until we all get personal jet packs or somebody renders the airplane obsolete.

      The presentation on the strongersouthwest.com site is interesting. Of course it has an agenda and there's a few things where meaning is slanted different than it was originally intended and obviously selective in which metrics used in comparison, but it does show a very clear picture of the underlying strength of what's at Southwest (though without strong leadership) and how underperforming they are in the industry, especially in comparison to DL and to a lesser extent UA. Not surprisingly, they outperform AA here and there. But I think WN has a stronger core than AA in brand, loyalty, certainly frontline employees, route coverage in individual cities, and physical assets.

    2. Tim Dunn Diamond

      WN's failure is in remaining deeply loyal to Boeing even before covid and the wheels have been continually falling off ever since then.

      WN has accepted BA's repeated "just six more months" mantra and failed to come up w/ alternatives to Boeing and to growing revenues with much fewer airplanes than Boeing promised Southwest.

      WN is flying the fleet it has as hard as it can but they can only do so much.

    3. Bruce Guest

      Tim, you obviously didn't read the presentation at strongersouthwest.com. Southwest has plenty of aircraft, but for some reason they have chosen to not abandon lousy routes and redeploy the aircraft to more profitable routes. The whining about an aircraft shortage is total BS based on Slide 36. A full 12% of Southwest's routes have a load factor below 70%, vs. 3% at American and 1% at United and Delta. My bet is even if they...

      Tim, you obviously didn't read the presentation at strongersouthwest.com. Southwest has plenty of aircraft, but for some reason they have chosen to not abandon lousy routes and redeploy the aircraft to more profitable routes. The whining about an aircraft shortage is total BS based on Slide 36. A full 12% of Southwest's routes have a load factor below 70%, vs. 3% at American and 1% at United and Delta. My bet is even if they cut half of these low load factor routes and redeployed the aircraft, it would generate significant extra RASM. I really home some analysts grill Southwest management on the next conference call as to why they are clinging to lousey routes? As a Southwest shareholder I fully support Eliot's attempt to fix the airline.

    4. john Guest

      One days volume of trading doesn't mean jack s***.

    5. Tim Dunn Diamond

      of course it doesn't. but Icahn's interest in JBLU pushed that airline's stock up, JBLU simply accelerated the plans it already were planning including pushing out Robin Hayes, and not much else has changed.
      There is no assurance that Elliott will do anything other than drive up the stock price and then cash out or reduce their holdings.
      WN has a plan to turn things around; I doubt that Elliott can suggest anything WN doesn't already have on the table.

  14. Lee Guest

    Offer "domestic first class" seats for Business Select and improve its operational record (late/cancel rate) and we'll talk. Otherwise, no thanks.

  15. Jim Guest

    "Yes, the brand isn't doing quite as good as it used to, let's change everything about it so that it becomes completely unrecognizable! Surely that will cure all our ills!"

    So hath said many, many, many MBAs, right before leading companies into Chapter 7...

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RLS Guest

European-style business class up front with the middle seat blocked is low investment and would be great for high yield business traveler and premium leisure traveler revenue.

2
frrp Diamond

Why does 'activist investor' always sound more like 'asshole investor'?

1
Retired Gambler Guest

Disagree - in this case SW needs a kick in the behind. They need assigned seats, extra legroom seats etc in order to both generate better revenue and also offer a higher quality product. The recent increase in Early Bird fees is dumb. I've flown SW maybe 3 times in the last couple of years (flew them frequently when lived in Nashville in early 2000s due to having non-stop flights) and either bought Early Bird or status matched to A List which includes Early Bird. Only ONCE was I in group A (toward the back). With the abuse of preboarding, sham seat saving and fact they allow so many to board between groups A and B if I actually paid for Early Bird and got stuck in group B I would be ticked. Assigned seats (which will allow them to charge for more premium ones) is the only option. You may consider that bad for consumers but I think it actually would improve the experience for many. As for private equity and hedge funds - I've worked with a few and agree they typically load companies with debt and cut costs. However, some costs can be cut without impacting customers. Also, SW has union agreements which would restrict the ability to cut non-management positions. As for employees being "less happy" I could care less - deliver a product I want to buy is all I ask. Isn't my job to worry about employee's happiness.

1
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