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An activist investor with a new $1.9 billion stake in Southwest is calling for big changes at the airline

Taylor Rains   

An activist investor with a new $1.9 billion stake in Southwest is calling for big changes at the airline
  • Elliott Management has called for changes at Southwest to fix what it says is poor performance.
  • Southwest's share price has plummeted over 50% in three years, to below March 2020 levels.

Southwest Airlines touts itself as the "LUV" carrier, with its two free checked bags and comedic flight crews — a strategy that revolutionized low-cost air travel and earned the carrier a 47-year profitability streak from 1973 to 2019.

However, Elliott Investment Management said Monday that the airline's decades-old strategies weren't working in modern times, and it's calling for a management and board-of-directors overhaul as part of a plan it's calling "Stronger Southwest."

"Poor execution and leadership's stubborn unwillingness to evolve the Company's strategy have led to deeply disappointing results for shareholders, employees and customers alike," the activist investment firm said in a letter announcing a new $1.9 billion stake, which makes it among the company's largest shareholders.

Elliott said Southwest leadership had a "rigid commitment" to the model it dreamed up decades ago, blaming that for today's shortcomings. It cited a major meltdown in December 2022 that affected millions of passengers, which stemmed from antiquated crew-scheduling systems and resulted in snowballing cancellations across the country.

"No senior executives were terminated for their role in the meltdown," it said. Elliott would also like to see new, outside talent on the board of directors.

Southwest's stock price has fallen more than 50% in three years, Elliot said, underperforming some competitors and falling below 2020 levels.

"The mandate from the Board has been clear: Keep doing things the way they have always been done," the letter said. Elliott added that its ideas could help push the stock up 77% to $49 a share.

Shares rose more than 7% in trading Monday after Elliott unveiled its stake.

Southwest says it's confident in its executive team

Southwest told Business Insider that it looked forward to "better understanding their views on our company" and defended its board and executive team.

"The Southwest Board of Directors is confident in our CEO and management's ability to execute against the company's strategic plan to drive long-term value for all shareholders, safely and reliably serve our customers, and deliver on our commitments to all of our stakeholders," a spokesperson said.

Raymond James' airline analyst Savanthi Syth said Southwest could improve its financial performance with better customer service and route enhancements, pointing to red-eye flights and suggesting the prospect of assigned seating.

"We are not surprised by activist interest in Southwest given the very strong franchise with valuable tangible and intangible assets," she said.

She added that Southwest had "correctly" started to scale back its ambitious growth plans and had the opportunity to address outdated technology.

Elliott Management, which oversees $66 billion in assets, is one of the world's most feared activist hedge funds. Beyond Southwest, the firm recently disclosed positions in Texas Instruments, the mining company Anglo American, and Match Group, the online-dating company behind Tinder.

"After 18 months of intensive research, we are convinced that Southwest represents the most compelling airline turnaround opportunity in the last two decades," Elliott said. "The significant investment we have made reflects our conviction that, with the right leadership, Southwest can regain its status as an industry-leading airline."

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