What Precedent Do The Hedge Fund’s Actions Set?

Southwest Airlines

was once the pinnacle of financial success in the world of commercial aviation, operating a simple, customer-loved business model for decades that delivered on all metrics. By keeping their aircraft on time, their passengers taken care of, and supporting their employees, the carrier managed to maintain an impressive reputation.

Most importantly, Southwest Airlines was once one of the most profitable airlines in the United States, reporting profits for nearly 50 years straight without so much as a single year in the red. That all changed, however, in 2021 when the combination of COVID-19, alongside several other challenges, rattled the airline and deeply affected its bottom line.

Today, Southwest Airlines has a different reputation. The carrier has struggled to maintain operational consistency, with multiple major logistical meltdowns becoming emblematic of the airline’s extensive challenges. This night-and-day shift has forced the Southwest Airlines leadership team to carefully consider its next steps as it attempts to identify the pathway to profitability.

But the airline’s leadership team now faces its biggest challenge yet, with activist hedge fund Elliot Management acquiring a larger and larger stake in the company. Just a couple of weeks ago, on August 26th, the investment corporation published an open letter to Southwest’s stakeholders, one which makes some bold claims about Southwest’s future. Let’s take a deeper look at Elliot’s latest blow in the battle for control of what was once America’s favorite airline.

An organization that means business

Elliott Management, a West Palm Beach-based hedge fund, is an investment management corporation led by Wall Street tycoon Paul Singer. The legendary investor, who has personal assets estimated to be more than $8 billion, remains the CEO of the company, which manages over $70 billion in assets.

The investment philosophy of Elliott Management involves activist investing, in which a company purchases a stake in a given company and uses it as leverage to pressure management into changing its strategic objectives. Often, Elliott will use their stake to launch activist campaigns that call for full-scale executive change.

As a result, it is unsurprising that Paul Singer has become known as one of Wall Street’s most feared activist investors. When a company becomes a target of Elliot Management’s investment team, it will often aim to change the company in ways that it believes will inflate its stock price, offering it an increased return on its investment.

A textbook example of Elliott’s intervention

On September 2nd, 2024, Reuters reported that Elliott Management now controlled a 10% stake in Southwest Airlines, clearing a threshold that provided the hedge fund with a surprising amount of power. This massive share provides Elliott with the ability to call an emergency meeting among Southwest shareholders, something the organization could very well do to push forward its agenda.

Photo: The Global Guy | Shutterstock

Considering that Southwest’s stock price has dropped by nearly 50% over the past three years, shareholders have good reason to be concerned about the airline’s management. Unsurprisingly, Elliott has publicly called for the airline’s CEO Bob Jordan, and Executive Chairman Gary Kelly to be removed immediately, despite their rather lengthy tenure at the company. Furthermore, the company has unleashed a large-scale plan for complete executive change at the company, even naming multiple different potential replacements for members of the airline’s board of directors.

In the hedge fund’s open letter, Elliott extensively criticized the management decisions made by Kelly and Jordan, the two who it sees as most responsible for the profitability crisis at hand. In the letter, Elliott explicitly stated as follows:

“The challenges Southwest faces today are immense: Years of mismanagement by Executive Chairman Gary Kelly and CEO Bob Jordan have caused the Company – and your investment – to decline in value and consistently underperform its significant potential.”

Photo: sockagphoto | Shutterstock

Over the three years prior to Elliott publicly acknowledging its stake in Southwest Airlines, the company noted the immense collapse in the carrier’s stock price. The letter would go on to note that the airline’s financial performance has fallen nearly to the low watermarks of the COVID-19 pandemic. After further analysis of the missteps made by Kelly and Jordan, Elliott goes on to name a number of potential successors to the members of the Southwest board of directors it believes should resign. This list includes:

• Michael Cawley, the Former Deputy CEO of Ryanair
• David Cush, the Former CEO of Virgin America
• Sarah Feinberg, a Former Transportation Regulator
• Hon. Joshua Gotbaum, a Former Hawaiian Airlines Trustee
• David Grissen, the Former President of Marriott International
• Nancy Killefer, a Former Senior Partner at McKinsey & Co.
• Robert Milton, the Former CEO of Air Canada and the Former Chairman of United Airlines
• Gregg Saretsky, the Former CEO of WestJet
• Easwaran Sundaram, the Fromer Chief Digital & Technology Officer of JetBlue
• Patricia Watson, the Former CIO and CTO of NCR Atleos

What is the bottom line?

The idea of activist investors attempting to shape the structure, business models and management of airlines is undoubtedly no new thing. Activist investors have been attempting to put their thumb on the scale for decades now, for both legacy carriers and low-cost airlines alike.

William Franke’s Indigo Partners, a major Arizona-based private equity firm, majorly shifted the structure of Spirit Airlines in the mid-2010s. Therefore, Elliott’s move with Southwest is met with strong precedent. What has been different, however, is Elliott’s characteristic aggressive approach to seeking managerial restructuring. With stock prices continuing to underperform and Elliott’s stake only growing, it will only be a matter of time before Southwest’s leadership team could be forced to face the music.