Elliott Investment Management, a prominent hedge fund, has initiated a proxy fight with Southwest Airlines, proposing to nominate 10 candidates for the carrier's 15-member board. This move comes as the airline's performance has fallen behind its competitors in recent months.
Southwest Airlines, founded in 1967 and known for pioneering the low-cost carrier model, has faced challenges in maintaining its historically strong performance. The company's shares have declined 12% since the beginning of 2024, while the S&P 500 has gained 14% during the same period. This underperformance extends to its operational metrics, with Southwest trailing Delta Air Lines, United Airlines, and American Airlines in second-quarter operating margins.
In response to Elliott's announcement, Southwest Airlines stated that it had repeatedly attempted to engage with the hedge fund to address concerns. The airline claimed that Elliott had agreed to a meeting in early September 2024 to discuss collaborative solutions, including board refreshment and governance enhancements. However, Elliott chose to publicly announce its intentions instead.
Elliott Investment Management, which has accumulated approximately an 8% stake in Southwest, has criticized the airline's leadership, calling for the replacement of CEO Robert Jordan and Chairman Gary Kelly. The hedge fund accuses them of causing Southwest to lag behind industry changes.
In July 2024, Southwest announced plans to improve revenue, including a shift from its iconic open seating policy to assigned seats and offering extra legroom at higher prices for about one-third of its seats. These changes mark a significant departure from the airline's long-standing practices, as Southwest has been known for its unique "open seating" policy since its inception.
Elliott's proposed slate of board candidates includes former CEOs of Air Canada, WestJet, and Virgin America, as well as former senior executives from JetBlue and Ryanair. The hedge fund's move aligns with its history of pressuring companies it deems underperformers to make management changes.
Despite the challenges, Southwest Airlines maintains several strengths. It has never experienced a fatal accident in its history and was profitable for 47 consecutive years until 2020. The airline operates a point-to-point route network and was the first major carrier to establish a website offering online booking.
As the situation unfolds, the airline industry and investors will be closely watching the outcome of this proxy fight and its potential impact on Southwest Airlines' future direction and performance.
"Naming a slate of director candidates marks a key step toward implementing the urgent changes needed at Southwest."
This development highlights the ongoing challenges faced by airlines in adapting to changing market conditions and meeting shareholder expectations in a highly competitive industry.