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Activist investor Elliott calls for Southwest Airlines leadership, board changes

Published 06/10/2024, 07:18 AM
Updated 06/10/2024, 03:55 PM
© Reuters. A Southwest commercial airliner takes off from Las Vegas International Airport in Las Vegas, Nevada, U.S., February 8, 2024.  REUTERS/Mike Blake
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By Rajesh Kumar Singh and Nathan Gomes

(Reuters) -Elliott Investment Management called for leadership and board changes at Southwest Airlines (NYSE:LUV) after reporting a stake worth about $1.9 billion in the U.S. carrier, saying the company needs fresh perspectives to compete in the modern airline industry.

Dallas-based Southwest's shares were up 7% at $29.71 after the activist investment management firm disclosed an 11% stake in the company, making it one of the largest investors.

Elliott criticized the company's leadership for "disappointing" financial performance at a time when the airline industry is experiencing strong travel demand. It asked for new leadership from outside of the company, saying CEO Bob Jordan has delivered unacceptable financial and operational performance quarter after quarter.

Southwest's EBITDAR, or earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs -

a measure for financial performance - is expected to be nearly 50% lower than 2018 levels, Elliott said.

It attributed the underperformance to "poor execution" and Southwest leadership's "stubborn unwillingness" to evolve the company's strategy.

"We believe that new leadership is required at Southwest," Elliott said in its letter to the airline's board.

A Southwest spokesperson said that while the company looked forward to better understanding Elliott's views, its board has confidence in Jordan's ability to drive long-term value for all shareholders.

Robert Mann, a former airline executive who now runs a consulting firm, said Elliott has given reasons for Southwest's poor stock performance without offering any answers.

"Unless you have specific ideas in mind, it's just kind of throwing grenades," Mann said. "All you're doing is saying, you don't like what's going on."

Jordan has had a rough ride since taking the helm in February 2022. A high-profile systems meltdown in the first year of his term led to the cancellation of almost 17,000 flights, leaving thousands of passengers stranded and costing the company more than $1 billion.

More recently, the airline has been reeling from Boeing (NYSE:BA)'s ongoing safety crisis. Southwest has warned of a hit to earnings as it expects to receive just 20 Boeing aircraft this year, less than a quarter of the number it had anticipated.

Southwest had planned to start operating MAX 7 aircraft - the smallest MAX plane - this year but FAA certification is now mired in uncertainty after Boeing withdrew a request for a safety exemption.

The carrier has called Boeing's delays "significant challenges" for this year and next as they have forced Southwest to moderate its growth plans.

To mitigate the impact, Southwest has accelerated plans to control costs and improve productivity. It is also reviewing its products and boarding policy.

Southwest's shares are up about 3% this year, compared with a roughly 12% rise in the S&P 500 index. Shares of rivals Delta and United have gained more than 25%.

Southwest shares trade about 19.52 times their forward profit estimates, compared with United's 4.74 and the industry multiple of 7.19.

Elliott, known for pushing for change to boost shareholder returns, said a comprehensive business review can help Southwest's stock hit $49 per share within 12 months.

© Reuters. A Southwest commercial airliner takes off from Las Vegas International Airport in Las Vegas, Nevada, U.S., February 8, 2024.  REUTERS/Mike Blake

The firm said Southwest's board, which it has asked for a meeting, does not include any director with external airline experience. It called for the board's reconstitution with "new, truly independent" directors possessing expertise in airlines, customer experience and technology.

"The mandate from the board has been clear: Keep doing things the way they have always been done," Elliott said.

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