When Southwest Airlines was started on a cocktail napkin by founder Herb Kelleher, there was a different philisophy in for this first very succesful airline.
New ideas, an out of the box approach, and a staff that worked together as a winning team – what happened?
In a letter sent today to the Board of Southwest Airlines Co., Elliott Investment Management L.P. outlined the feedback received and significant events that have transpired since the release of Elliott’s initial letter and presentation last month, which called for a change in leadership.
Elliott Investment Management L.P. is one of the oldest investment managers of its kind under continuous management. Elliott is also one of the major investor in this Texas based carrier.
As of December 31, 2023, Elliott manages approximately $65.5 billion in assets. The firm employs a staff of 570 people, including nearly half dedicated to portfolio management and analysis, trading, and research, in its Florida headquarters and affiliated offices elsewhere.
A letter submitted today by Elliott to the Southwest Airlines shareholders and board indicates that the Company’s performance is unsatisfactory, and a change in leadership is necessary to restore Southwest to its former prominent position in the industry.
According to Elliott, the recent decisions made by Southwest’s Board of Directors and management team following the release of its Stronger Southwest materials, have further strengthened the argument for a change in leadership.
The actions mentioned in the letter, such as implementing an outdated and unfriendly “poison pill” strategy to limit Elliott’s ownership to 12.5% on July 3, and appointing a new director who seems to support the current leadership and strategy, highlight the disconnect between the Board and shareholder sentiment.
The letter emphasized how Southwest’s Board is increasingly out of sync with the shareholders and the actual circumstances at hand.
Elliott stressed the importance of the Board recognizing that Southwest’s leadership has already eroded the trust of its shareholders. Shareholders lack confidence in the Board and management’s ability to develop and implement an innovative strategy to revitalize Southwest.
Elliott reiterated the proposed steps toward a more successful future for Southwest Airlines:
- Strengthen the Board of Directors
- Improve Leadership
- Conduct a thorough Business Review
Elliott has also expressed willingness to work with the Board to move forward, but in the absence of agreement, Elliott plans to promptly involve shareholders in deciding on crucial leadership adjustments.
Southwest Airlines investor indicated in their letter to Southwet Airlines board members, saying the purpose of today’s letter is to summarize the feedback we have received and the key events that have occurred since the publication last month of our letter and presentation on the urgent need for leadership change at Southwest Airlines.
Since publishing our views on June 10, we’ve had the opportunity to engage with shareholders, equity research analysts, industry executives and current and former employees. Many new institutions and individuals have reached out to us, providing us with new sources of insight and information, and this trend is continuing. The feedback has been overwhelmingly consistent with our perspective that the Company’s performance is unacceptable and that leadership change is required to return Southwest to its once-leading position in the industry.
The Case of Southwest Airlinens Leadership change
The actions of Southwest’s Board and management team since we published our views have only solidified the case for leadership change:
• On June 26, Southwest announced significantly reduced unit revenue guidance for the second quarter, continuing its disappointing trend of industry-lagging revenue performance (which appears to have become a habit). This announcement marked the eighth guidance reduction in the last 18 months.
• On July 3, this Board put its own self-interest ahead of the Company’s by pursuing the entrenchment strategy of adopting an antiquated and shareholder-unfriendly “poison pill” to prevent Elliott from increasing its stake above 12.5%.
• And today, the Board announced that it had appointed a handpicked new director in a clear attempt to entrench itself and the current management team, thereby expanding the size of the current Board to 15 members. Among the criteria for selecting this new director was clearly that he would be supportive of Southwest’s current leadership and status-quo approach, as he noted in the announcement that he was “look[ing] forward to supporting the Company’s strategic direction.”
These actions – and in particular the adoption of the “poison pill” – demonstrate how profoundly out of touch Southwest’s Board has become with shareholder sentiment and with the reality of the situation. Contrary to the Company’s statements, Elliott is not seeking control of Southwest. Quite simply, we are seeking to strengthen oversight, upgrade management and improve Company performance. Preventing shareholders who do not support the Company’s failed leadership and oversight from purchasing additional stock reflects exceptionally poor governance and underscores the immediate need for accountability at Southwest. This is the worst kind of governance – a shield for failure and a sword for nothing except the fees of advisers who propose these anti-shareholder devices.
In light of these actions, we have become increasingly concerned by the “self-help” half-measures that the Board appears to be contemplating and adopting, none of which will do anything to allay the lost credibility of Southwest’s management.
Elliott does not make calls for leadership change lightly or without regard to potential consequences. In this instance, given the long record of falling short and the deep loss of confidence in Southwest’s leadership among shareholders and other constituents, it is simply untenable for the same Board and management team to continue to lead Southwest.
Shareholder Feedback Supports Leadership Change
The feedback we have received since releasing our materials on June 10 underscores a profound lack of confidence in Southwest’s leadership, strategy and performance, and has reinforced our conclusion that Board and leadership change is necessary to put Southwest on the right path.
Since the release of our letter, we have spoken with numerous shareholders representing a significant percentage of Southwest’s shareholder base. While these conversations have been confidential, we can characterize the sentiments expressed by these shareholders as being overwhelmingly supportive of leadership change.
This was well illustrated by the public support for our campaign offered by Southwest shareholder Artisan Partners on June 12, when it called on the Board to “reconstitute itself and upgrade the Company’s leadership such that it can objectively assess the best path forward for Southwest’s shareholders, employees, and customers. We believe this process needs to commence immediately.”
Other conversations echoed the feedback we received in the shareholder survey we commissioned before publishing our views. Below, we have included a representative sample of perspectives shared by some of Southwest’s largest investors as part of the survey, with such sentiments having been confirmed in our most recent discussions:
“The CEO is a headwind to a turnaround. Firing him is the tailwind.”
The worst performing management team in the airline industry
“I would rate them as the worst-performing management team in the airlines. This was a Company that has destroyed more value based on their own inaction than anyone else in the industry. They need to go.” – Top 10 Active Shareholder
“They need a new look across the board and you are only going to get that with [a CEO] who is not from Southwest… This is a classic example of where a disruptor stayed in the original model as the industry passed them by and now they have a problem.”
Zero Confidence in Southwest Airlines Leadership
“I have zero confidence this team can get this right and certainly not in the timeframe that is needed. I rarely call for wholesale change at a company, but that is what is needed here.”
“Having the current CEO drive the process for a new strategy is not a good idea. I think that means we get glacial change and even if they say they are going to become SpaceX there is still going to be a fairly material overhang in the stock because of skepticism about the execution. This is a good time for the change.” – Top 10 Active Shareholder
