Activist Investor pushing changes at SWA
06-09-2024, 07:52 PM
#1
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Activist Investor pushing changes at SWA
06-10-2024, 05:31 AM
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I think we can assume that BJ is the fall guy and will be gone in the coming weeks or months. I do wonder if this will be like what happened at Disney where Bob Iger retired and became Executive Chairman and promoted Bob Chapek to CEO which ended up being a disaster. Chapek was ultimately shown the door after activist investors demanded a change and Bob Iger became CEO again. Will we see GK pull a Bob Iger and become CEO again?
06-10-2024, 05:35 AM
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https://www.cnbc.com/2024/06/10/southwest-luv-activist-elliott-stake.html?__source=iosappshare%7Ccom.apple.UIKit. activity.Message
Elliott takes $1.9 billion stake in Southwest Airlines, seeks to oust CEO and chair
Activist hedge fund Elliott Management has amassed a $1.9 billion stake in Southwest Airlines and plans to push for leadership changes at the airline that has lagged big rivals.Elliott is seeking to replace Southwest CEO Bob Jordan and chair Gary Kelly, the activist said in a letter Monday. Elliott believes that Southwest has fallen from a “best-in-class” airline to one of the biggest laggards, according to a presentation detailing its case for change.
The size of Elliott’s stake makes the activist one of Southwest’s largest shareholders, according to FactSet.
Shares of Southwest were up roughly 7% in premarket trading Monday. The company had a market capitalization of $16.6 billion as of Friday’s close.
Elliott said it spoke with numerous former Southwest employees during an 18-month research period, according to a presentation. The activist also said it spoke with shareholders and surveyed more than 2,000 flyers to understand why consumers chose Southwest over other airlines, according to that same presentation.
Southwest has struggled with delays at Boeing of new 737 Max planes, the newest models of the plane which the carrier exclusively flies, as well as shifting travel demand patterns after the pandemic.
The airline’s leaders are now looking for new ways to drum up revenue to better compete with rivals that offer travelers more perks and products.
Jordan, who replaced Kelly as CEO in February 2022 after decades with the airline, told CNBC in April that the carrier is considering ditching its single class of airplane seating and longtime boarding method.
The airline also faced a reckoning from a holiday meltdown at the end of 2022 that cost it more than $1 billion and forced the airline long known for good customer service to win over the flying public and make quick fixes to its internal staff scheduling software.
Southwest shares are down by more than 50% from three years ago when travel demand, led by domestic trips, was starting to come back. In contrast, Delta Air Lines shares are up around 10% over that period and United Airlines are down about 7%.
Elliott’s campaigns at other companies have likewise centered on a change in leadership. Elliott’s second campaign at Crown Castle in 2022 and settlement agreement with automotive parts supplier Sensata earlier this year are just two instances.
In just the last few months, the activist has taken a $2.5 billion stake in semiconductor firm Texas Instruments, a $2 billion stake in Japanese conglomerate SoftBank and a $1 billion stake in mining concern Anglo American.
This is breaking news. Please check back for updates.
06-10-2024, 06:33 AM
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Elliott Sends Letter and Presentation to the Board of Southwest Airlines
Elliott Investment Management L.P. Discloses Approximately $1.9 Billion PositionCalls for Upgraded Leadership and Comprehensive Business Review
Believes Southwest Stock Can Achieve $49 per Share, a 77% Return
Full Letter and Presentation Available at StrongerSouthwest.com
WEST PALM BEACH, Fla., June 10, 2024 /PRNewswire/ -- Elliott Investment Management L.P. ("Elliott"), which manages funds that together have an investment of approximately $1.9 billion in Southwest Airlines Co. (NYSE: LUV) (the "Company" or "Southwest"), today sent a letter to the Board of Directors of Southwest.
The letter substantiates Elliott's view that Southwest's 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.
Southwest's rigid commitment to a decades-old approach has inhibited its ability to compete in the modern airline industry, Elliott said, and this ethos pervades the entire business with outdated software, a dated monetization strategy and antiquated operational processes. Elliott's letter asserts that the Company's failure to modernize is underscored by Southwest's December 2022 operational meltdown, which stranded more than two million travelers over the holidays.
Elliott noted that Southwest's share price has declined by more than 50% over the past three years and is now below the levels at which it traded in March 2020during the depths of the COVID pandemic. The letter also highlighted that disappointing financial performance has cost each frontline employee tens of thousands of dollars on average in the form of lower profit sharing and declines in the value of employee-owned stock.
As a result of this poor performance, Elliott believes that new leadership is required at Southwest, which represents the most compelling airline turnaround opportunity in the last two decades, according to the letter.
As part of its "Stronger Southwest" plan, Elliott outlined three recommendations to improve the Company's performance:
1) Enhance the Board
2) Upgrade Leadership
3) Undertake a Comprehensive Business Review
By executing on the Stronger Southwest plan, Elliott believes the Company can return to its rightful position as an industry leader, including generating best-in-class margins and compelling returns for its shareholders. In doing so, Elliott argues that Southwest's stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period.
Elliott is convinced that Southwest's issues are addressable with the right leadership and a comprehensive, unbiased evaluation of available opportunities, and looks forward to collaborating with the Company to restore accountability and best-in-class financial performance for the benefit of Southwest shareholders, employees and customers.
The full text of the letter follows:
June 10, 2024
The Board of Directors
Southwest Airlines Co.
2702 Love Field Drive
Dallas, Texas 75235
Dear Members of the Board:
We are writing to you on behalf of funds managed by Elliott Investment Management L.P. (together with such funds, "Elliott" or "we"). Elliott has made an investment of approximately $1.9 billion in Southwest Airlines ("Southwest" or the "Company"), representing an approximately 11% economic interest and making us one of the largest investors in the Company.
Southwest is a legendary airline with a proud history. Since starting service in 1971, Southwest revolutionized the airline industry with an innovative business model built on operational excellence and a commitment to providing customers with a low-cost alternative to the legacy airlines. This winning strategy generated decades of success and allowed Southwest to become the premier U.S. domestic airline, with 47 consecutive years of profitability in a highly competitive and challenging industry. Along the way, Southwest became a beloved brand among customers and a motivating career opportunity for its employees.
Today, however, 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. Southwest's share price has declined by more than 50% in the past three years and has now fallen below the levels at which it traded in March 2020, during the depths of the COVID-related travel shutdowns. And while the U.S. airline industry is seeing record revenues and peer airlines are enjoying very strong profitability, Southwest's 2024 EBITDAR is expected to be nearly 50% lower than 2018 levels. In addition to negative returns for shareholders, this disappointing financial performance has cost each frontline employee tens of thousands of dollars on average in the form of reduced employee profit-sharing and declines in the value of Southwest stock held by employee retirement plans.
After 18 months of intensive research, we are convinced that Southwest represents the most compelling airline turnaround opportunity in the last two decades. The significant investment we have made reflects our conviction that, with the right leadership, Southwest can regain its status as an industry-leading airline. In this letter and the appended presentation, we lay out our perspectives on how Southwest can reclaim its status and achieve the success that Southwest's shareholders, employees and customers deserve.
Southwest Today
Southwest's rigid commitment to an approach developed decades ago has inhibited its ability to compete in the modern airline industry; this ethos pervades the entire business with outdated software, a dated monetization strategy and antiquated operational processes. This failure to modernize is vividly underscored by the December 2022 operational meltdown that was caused by the Company's outdated technology, which led to Southwest stranding over two million customers over the holidays.
Southwest's Executive Chairman and its CEO, who have spent a combined 74 years at the Company, have presided over a period of severe underperformance, and they have demonstrated that they are not up to the task of modernizing Southwest. Since his appointment, Southwest CEO Bob Jordan has delivered unacceptable financial and operational performance quarter after quarter, resulting in seven negative guidance revisions in the last 17 months. Operational metrics are pointing in the wrong direction: Southwest's unit costs – a core priority for a low-cost carrier – have ballooned, while unit revenues have lagged peers. Even as the Company's performance has deteriorated, Jordan has demonstrated a surprising level of complacency, describing each quarter as "great" or "strong" while the earnings outlook continues to fall. Despite the management team's assertions that it is "absolutely committed" to bringing per-unit costs under control, management guided costs meaningfully higher for 2024 and revised cost guidance upward again in April.
Southwest's Board has failed to hold management accountable for poor execution and has been unable to catalyze (or permit) the necessary strategic evolution. Instead, the Board has reinforced an insular culture and outdated thinking in the face of indisputable evidence that change is required. The Board includes no directors with external airline experience, and a majority of the independent directors were recruited by Executive Chairman Gary Kelly. This Board has in turn selected a management team that, of the eight most senior executives, includes only one executive with experience at another airline; the rest have worked at Southwest for an average of over 25 years. The mandate from the Board has been clear: Keep doing things the way they have always been done.
The lack of accountability is best reflected in the Company's response to the December 2022 operational meltdown. In a clear display of poor leadership, CEO Bob Jordan declined to testify in front of Congress after the meltdown, despite attending a company rally just 40 miles away in Baltimore the prior day. No senior executives were terminated for their role in the meltdown. Most concerning, and in blatant disregard for the affected customers and employees, the Board nearly doubled the compensation of all key executives in the year after the incident.
We believe that new leadership is required at Southwest. While Southwest has a proud history, that history is not an argument for supporting poor leadership and sticking with a strategy that no longer succeeds in the modern airline industry. Rather, Southwest's legacy necessitates evolution and change to regain industry leadership for its customers, employees and shareholders. As one of Southwest's largest investors, we are committed to delivering the necessary leadership changes to achieve this goal.
A Stronger Southwest
In the accompanying presentation, "Stronger Southwest," we outline our views on the challenges the Company faces today and our recommendations to drive improved performance, which we summarize below:
(1) Enhance the Board of Directors: The Board should be reconstituted with new, truly independent directors from outside of Southwest who have best-in-class expertise in airlines, customer experience and technology.
(2) Upgrade Leadership: Southwest must bring in new leadership from outsideof the Company to improve operational execution and lead the evolution of Southwest's strategy.
(3) Undertake a Comprehensive Business Review: Southwest should form a new management and Board-level committee to evaluate all available opportunities to rapidly restore the Company's performance to best-in-class standards. This review would modernize Southwest's strategy and operations with a focus on increased customer choice, improved cost execution and updating outdated IT systems, among other opportunities, and it should leverage the fresh perspectives of the new directors to help formulate the optimal go-forward plan for Southwest.
By executing on the Stronger Southwest plan, we believe the Company can return to its rightful position as an industry leader, including generating best-in-class margins and compelling returns for its shareholders. We believe Southwest's stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period. For the Company's frontline employees who have a meaningful economic stake in Southwest's success, we believe the plan would result in substantial incremental long-term value from additional profit-sharing payouts and appreciation of employee-owned stock.
The Stronger Southwest plan puts the Company on a path to more sustainable performance that will better serve customers, employees and shareholders. The plan modernizes Southwest's approach to ensure that its offering is aligned with customer preferences. It upgrades leadership to improve execution. It drives the efficiency required to continue offering low fares. And it facilitates the necessary investments to run the reliable operation that customers and employees expect.
Next Steps
Southwest became a leading airline by innovating and executing. Today, Southwest's failure to execute and evolve has led to deteriorating performance, and the Company simply is not living up to its legacy of efficiency and top-tier results. Nevertheless, we are convinced the issues the Company currently faces are addressable with the right leadership and a comprehensive, unbiased evaluation of the available opportunities.
We look forward to collaborating with Southwest to restore accountability and best-in-class financial performance for the benefit of the Company's employees, customers and shareholders. To that end, we will make ourselves available for a meeting with you at your earliest convenience to discuss these issues in greater detail and to align on the changes that Southwest needs in order to deliver on its significant potential.
Sincerely,
John Pike
Partner
Bobby Xu
Portfolio Manager
About Elliott
Elliott Investment Management L.P. (together with its affiliates, "Elliott") manages approximately $65.5 billion of assets as of December 31, 2023. Founded in 1977, it is one of the oldest funds under continuous management. The Elliott funds' investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.
Media Contact:
Casey Friedman
Elliott Investment Management L.P.
(212) 478-1780
[email protected]
SOURCE Elliott Investment Management L.P.
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