For the past few months, West Palm Beach, Florida-based activist hedge fund Elliott Management has been slowly buying up shares in American low-cost carrier 
Southwest Airlines
, with a bold vision for revamping the carrier and eliminating what it believes are its largest issues. According to many communications from Elliott Management to Southwest shareholders, the hedge fund believes the airline’s profitability issues in recent years can be attributed primarily to incompetent management decisions.
Photo: Philip Pilosian | Shutterstock
According to the Associated Press, Elliott Management now owns more than 10% of the shares in Southwest Airlines, demonstrating a position that provides it with some unique leverage, including the ability to call special shareholders’ meetings. The hedge fund, which legendary activist investor Paul Singer leads, has become known for its unconventional investment tactics. Specifically, the company chooses to invest in companies and pressures management to either change or significantly adjust its strategy to increase stock prices.
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Long-term goals
Recently, Elliott Management indicated its long-term vision for Southwest, arguing that the carrier will not be able to find a long-term path to profitability until the airline’s leadership team, including CEO Bob Jordan, is removed from his position. In a statement to Southwest shareholders that included a list of potential replacement candidates for Jordan and new potential appointees for the board of directors, the hedge fund indicated as follows:
“Although Elliott’s goal has been to collaborate with Southwest to restore accountability and best-in-class financial performance, Southwest has chosen a go-it-alone path, featuring a chaotic series of defensive actions, with the goal of obstructing a leadership change that is urgently needed.”
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Southwest Airlines
- IATA/ICAO Code
-
WN/SWA
- Hub(s)
-
Baltimore/Washington International Thurgood Marshall Airport
, Dallas Love Field
, Denver International Airport
, Harry Reid International Airport
, Hartsfield-Jackson Atlanta International Airport
, Houston Hobby Airport
, Los Angeles International Airport
, Midway International Airport
, Oakland International Airport
, Orlando International Airport
, Phoenix Sky Harbor International Airport - Year Founded
-
1967
- CEO
-
Robert Jordan
- Country
-
United States
Elliot is unsatisfied with the recent changes made by Southwest
Southwest initially took some steps, which it hoped would likely lead the hedge fund to back off of its aggressive stance. Back on September 10th, despite the carrier’s Chairman and former CEO Gary Kelly announcing his imminent resignation and Southwest deciding to revamp its board of directors with four new candidates, the investment management firm was still not satisfied, according to CBS News.
Photo: Philip Pilosian | Shutterstock
After meeting with unions that represent Southwest’s group workers and purchasing even more stock, Elliot made it clear that they would not be satisfied with marginal improvements and continued to push for complete executive transformation. Doubling down on this notion, Elliott partner John Pike and portfolio manager John Xu, had the following words to share back on September 24th, a full two weeks after receiving Southwest’s “marginal” proposal for executive turnover:
“The need for change is urgent, and our request for a special meeting may come as soon as next week.”
Southwest’s plan to fight back
But as of now, the hedge fund has yet to call its special meeting, and the carrier has begun to fight back, with one notable figure becoming an important figurehead in the fight to defend the airline’s existing management. Among the directors recently appointed by the airline is Rakesh Gangwal, the former founder of arguably the world’s most robust low-cost carrier, Indian behemoth IndiGo.
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The director, who has been quick to indicate his support for the carrier and its leadership team despite heavy scrutiny, recently purchased over $100 million in Southwest Airlines shares. In a statement published by Benzinga, the executive had the following words to share:
“I believe changing the board structure and top leadership beyond what has already been announced, would be counterproductive and not in the best interest of shareholders.”
Southwest Airlines itself has also been quick to criticize Elliott’s lack of ability to work together for a long-term solution to the carrier’s issues. In multiple statements since the carrier announced its board transformation, it centered rhetoric around the following three points:
- Southwest has made every effort to work with Elliott, including many phone calls between key leadership figures on both sides.
- Elliott had already made its determination that full-scale executive change was the solution without even hearing the leadership team’s strategic plan.
- The hedge fund has prevented its candidates for the board of directors from meeting with the airline’s existing board.
So, what does this mean for the airline?
Southwest Airlines has the unique attention of the entire financial world. While Bob Jordan is fighting for his job at the carrier’s helm alongside many others on the executive team and the board of directors, Elliott Management, led by billionaire Paul Singer, is looking to realize its vision for a full-scale leadership change. Gangwal has now emerged as a third figure in all of this, another billionaire attempting to wield his influence to push the activist investor away from Southwest.
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The next move in Elliott’s arsenal would be to call a special shareholders’ meeting, which would make the case to all holders of Southwest common stock why management needs to change. Just by listening to Southwest’s rhetoric in their latest releases, the carrier appears at the ready to make its case at such a meeting, with all the following companies currently acting as its financial and legal advisors:
- Bank of America Securities
- Morgan Stanley & Co
- Vinson & Elkins LLP
- Kirkland & Ellis LLP
Photo: Angel DiBilio | Shutterstock
It looks like Bob Jordan and the existing management team at Southwest are ready to publicly defend themselves, something Elliott has been quick to categorize as irrational self-preservation. Nonetheless, Elliott has never been known to go quietly, especially if you look at some of its previous activist investments in companies like Cabela’s, Hess, and Samsung.