Elliott Investment Management has made a significant move by acquiring a $1.9 billion stake in Southwest Airlines, marking its position as one of the airline’s largest shareholders.

The hedge fund’s intent is clear: it aims to instigate major changes in the leadership and strategic direction of the airline, which has been struggling with operational and financial setbacks.

Demand for Leadership Overhaul

In a letter addressed to Southwest’s board, Elliott Management did not mince words, criticizing the current management for poor execution and an unwillingness to evolve.

The firm specifically called out CEO Robert Jordan and Executive Chairman Gary Kelly for their roles in what was described as the airline’s underperformance. “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 letter stated.

Southwest’s Operational Struggles

Southwest Airlines, once a model of efficiency and cost control among discount carriers, has faced numerous challenges in recent years. The airline reported deeper-than-expected losses and lower-than-anticipated revenue in the first quarter of 2024. 

The company’s exclusive reliance on Boeing 737 aircraft has compounded its issues, particularly in light of delivery delays and other production setbacks.

A major incident in December 2022, where outdated software and operational processes led to massive flight cancellations, further exposed the cracks in Southwest’s operational infrastructure. This disruption has had a lasting impact on the airline’s reputation and financial health.

Elliott’s Strategic Vision

Elliott’s $1.9 billion investment, which accounts for about 11% of Southwest’s shares, comes with a thorough 51-slide presentation outlining the changes it thinks are necessary.

Among the firm’s recommendations are the appointment of new directors, the introduction of more external executives, and a comprehensive review of Southwest’s business strategy.

The firm highlighted the need for modernization and adaptation to current industry standards, referencing a quote from Southwest’s founder, Herb Kelleher: “If things change faster outside your company than they change inside your company, you’ve got something to worry about.”

Southwest’s Response

Southwest Airlines responded to Elliott’s assertions with a statement expressing a willingness to engage. “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.

Market Reaction

The market reacted positively to the news of Elliott’s involvement, with Southwest’s shares rising 7% on Monday, marking their second-best day since 2020. Investors are hopeful that Elliott’s influence will drive necessary changes and improve the airline’s performance.

Industry Context

Southwest Airlines, known for its no-frills service and absence of fees for checked bags and reservation changes, has seen its competitive edge erode. Rivals have adopted similar policies and have attracted upscale travelers with better seats and amenities. 

The airline has also faced challenges in scaling its operations post-pandemic, including cutting some airport routes and dealing with aircraft delivery delays. Despite these issues, Southwest reported record revenue of $26.1 billion last year. 

However, its profit of $465 million was significantly lower than in previous years and paled in comparison to the earnings of its major competitors like Delta and United.

Analysts’ Perspective

According to Savanthi Syth, an airline analyst at Raymond James Financial, Southwest’s strong brand, dominant position at many airports, and sound balance sheet are what are driving Elliott’s interest.

She noted that while Southwest has recognized the need to scale back growth, the airline’s delayed response has resulted in higher costs.

Looking Ahead

Elliott Management’s intervention could lead to significant changes at Southwest Airlines, potentially revitalizing the carrier’s fortunes. With the possibility of new leadership and strategic adjustments, stakeholders are optimistic about a turnaround. 

However, the coming months will be crucial as Southwest navigates these proposed changes and strives to regain its competitive edge in the airline industry.

The information is taken from CBS News and Yahoo News