After it bought $1.9 million worth of shares in Southwest Airlines (LUV) back in June, investment firm Elliott Investment Management wasted no time in expressing its desire to see existing CEO Bob Jordan and board chairman Gary Kelly ousted over what it classified as "poor execution and leadership's stubborn unwillingness to evolve the company's strategy."
The airline has struggled to come out of a string of unprofitable quarters and, after a most recent second-quarter showing that revenue fell by 46% to $367 million, announced that "urgent and deliberate steps" were needed to turn things around. The most drastic of these steps was the announcement that the airline would soon rework its decades-long open seating policy to allow customers to pay extra for an assigned seat.
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While this is being done with the goal of getting Southwest an additional profit stream, Elliott was not impressed with the turnaround plan that also included starting to run red-eye flights between cities such as Baltimore and Las Vegas.
Elliott Investment Management: 'Southwest can do far better'
"This failed leadership team's announced initiatives — obvious attempts at self-preservation — are simply not credible," Elliott said in a statement on behalf of Partner John Pike and Portfolio Manager Bobby Xu. "Too little, too late is not a strategy. It's time for new leadership."
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It further said that "Southwest can do far better and we look forward to offering our fellow shareholders an opportunity to elect a Board of industry leaders that can return Southwest to best-in-class performance."
Southwest previously denied Elliott's classification of its chief executive's performance and said that it was "confident" that the current leadership can continue to "provide long-term value" for investors. Company stock started the week down by 3% at $27.23 — shares had taken hits both after the earnings report came out and following Elliott's statement.
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Change 'comes more than a decade late,' Elliott says
"Southwest's announcement of revenue-enhancement initiatives, purporting to offer assigned seating, premium-seating options, and red-eye flights, comes more than a decade late, and after a 50% decline in its share price over the past three years," Elliott's statement reads further.
As part of the earnings announced last week, Southwest also said that nonfuel costs are expected to rise by at least 13% by the end of the year while unit revenue can fall a further 3% in the current quarter even if second-quarter revenue rose by 4.5% to $7.35 billion from a year ago.
The disagreement between Southwest and its largest shareholder ultimately comes down to whether the proposed changes will be enough to turn the airline's situation around or whether it is only a band-aid fix when a complete overhaul is needed. In April 2024, the airline also announced that it was pulling out of four airports in which it was not getting enough traffic — Mexico's Cozumel, New York's Syracuse, Washington's Bellingham, and Houston.
"Although our unique open seating model has been a part of Southwest Airlines since our inception, our thoughtful and extensive research makes it clear this is the right choice — at the right time — for our customers, our people, and our shareholders," Jordan said.
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