Southwest Airlines Ends Feud With Activist Investor… Now What?

It has been a fascinating several months for Southwest Airlines, ever since an activist investor took a major stake in the airline. That activist investor, Elliott Investment Management, has been calling for massive changes to Southwest’s business model, and has been trying to oust most of Southwest’s management.

While Southwest management has been making major changes (like adding preferred and extra legroom seating, and introducing redeye flights), that hasn’t been enough for Elliott, at least until now. There’s now a major update, as it looks like the battle between the two companies is coming to an end. It remains to be seen what this means for the future of the airline, though…

Southwest appoints six new independent directors

Southwest Airlines has today announced the appointment of six new independent directors, as part of an agreement reached with Elliott. The new directors include the following, all of which were recommended by Elliott:

• David Cush, who has a lot of aviation experience, and most recently served as CEO of Virgin America
• Sarah Feinberg, former Administrator at the Federal Railroad Administration, Chief of Staff to the US Secretary of Transportation, and Interim President and CEO of the New York City Transit Authority
• David Grissen, former Group President of Marriott International
• Gregg Saretsky, former CEO of WestJet, who has over 40 years of aviation experience
• Patricia Watson, who serves as Chief Information and Technology Officer at NCR Atleos, and who has experience in the technology industry
• Pierre Breber, who is the former CFO of Chevron (he will also join the Board of Directors)

All of these appointments are as of November 1, 2024.

It was also recently announced that Executive Chairman Gary Kelly will step down. That’s now being accelerated, and as of November 1, 2024, he’ll become Chairman Emeritus. The newly reconstituted Board will appoint a new independent Chairman. The Board will be reduced to 13 members as of Southwest’s 2025 Annual Shareholder Meeting.

As part of this update, Southwest has entered into a Cooperation Agreement under which Elliott has agreed to standstill, voting, confidentiality, and other provisions, as well as an Information Sharing Agreement, which enables Southwest to share confidential information regarding upcoming company announcements.

Elliott has also withdrawn its request to call a special meeting of shareholders, and no longer intends to nominate candidates to stand for selection to the board. What’s also worth mentioning is that Southwest CEO Bob Jordan seemingly keeps his job, even though Elliott was trying to get him to step down.

Here’s how Southwest Chairman Gary Kelly describes this development:

“We are pleased to have reached a collaborative resolution with Elliott, continuing our Board refreshment with the addition of new directors who bring complementary skills and experience. I am confident this Board will continue to hold the leadership team accountable for executing its transformational plan and delivering financial performance. It has been the honor of my lifetime to work with our People and serve our Customers in making Southwest the leader it is today. I believe Southwest’s best days lie ahead under the vision and leadership of Bob Jordan and the oversight of this reconstituted Board.”

Here’s how Elliott Partner John Pike and Portfolio Manager Bobby Xu describe this development:

“We are pleased to have come to an agreement with Southwest on the addition of six new directors that will enhance and revitalize its Board. They are all highly qualified and will bring diverse skills and backgrounds to the task of overseeing Southwest under the leadership of a new Board Chairman. We believe the strategic changes Southwest has announced since we commenced our engagement, together with the new independent directors and governance improvements, will position the Company to enhance business performance, drive operational execution and evaluate additional changes to create long-term shareholder value. We are grateful to Southwest’s shareholders, labor groups, and leadership for their constructive engagement, and we look forward to a strengthened Southwest delivering on its full potential.”

What are we supposed to make of this development?

It seems to me like this is both good and bad news, depending on how you look at it. I mean, for that matter, I guess it depends on whether you consider Elliott forcing major changes at Southwest to be positive or negative.

On the plus side, with this agreement there should be less hostility between Southwest and Elliott, and Southwest can at least avoid a special meeting of shareholders. The two sides seem to be on the same page… sort of.

Elliott basically got everything it wanted when it comes to changes to the composition of the Board, while Southwest gets to keep its current CEO.

I suppose that raises the question of whether we’re actually any further along than we were before this agreement was reached. It seems that the contention may now be between the Board and the CEO, as Elliott wants to push for much more drastic changes than Southwest is willing to make.

It’s anyone’s guess how this all plays out. I think a few of the changes that Elliott is pushing for make sense. At the same time, Elliott doesn’t have Southwest’s best long term interest in mind, and for that matter, doesn’t really seem to have an understanding for the company’s culture, and how it has operated for decades.

Bottom line

The public feud between Southwest and Elliott is over, though in many ways, the disagreements are probably just getting started. Elliott got to appoint six independent directors, while Southwest got to keep its CEO. The companies have essentially called a truce, though that doesn’t mean it’s smooth sailing going forward. Now the question turns to what changes will be pushed for under this new arrangement.

What do you make of these Southwest Airlines updates?