The board of Southwest Airlines (WN, Dallas Love Field) is out of touch with shareholder sentiment and needs to change, according to shareholder Elliott Investment Management L.P. The company sent a letter to the board on July 8, claiming that it and airline executives appeared incapable of devising a plan to turn around the company.
Elliott, which holds around 11% of Southwest's stock, has a history of investing in entities and forcing changes, and went public with criticisms of Southwest's board and management in June. It alleges to have since received considerable feedback from investors, analysts, and industry insiders agreeing that the airline's performance is unacceptable and leadership change is required.
The investment house was also sharply critical of the board's decision to exercise a so-called poison pill option earlier this month, approving a limited-duration shareholder rights plan that prevents Elliott from increasing its stake above 12.5%.
"The adoption of the 'poison pill' demonstrate[s] how profoundly out of touch Southwest’s board has become with shareholder sentiment and with the reality of the situation," the letter reads. "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 [...]. 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."
In addition to the shareholder rights plan, Elliott criticised a recent Southwest announcement that significantly reduced unit revenue guidance for the second quarter of 2024. Elliott said the airline had developed a lagging industry revenue performance "habit." Elliott was also critical of a recent decision to appoint a new director - IndiGo Airlines (6E, Delhi International) founder Rakesh Gangwal - increasing the board size to 15, and entrenching a "status-quo approach."
"Investors do not want to see a new plan from the same leadership team whose record at the company has been one of failure," the letter added. "They want new leaders who will bring outside perspectives and proven expertise to the task of preserving all that was great about Southwest while charting a higher-performing future for the airline."
Elliott wants to make three changes - overhauling the board, which it says currently lacks independence and relevant experience; replace the CEO Bob Jordan with an external appointee with industry experience and a proven track track; and conduct a business review with a view to implementing a new strategy. "We believe that fresh perspectives, operational excellence and an openness to evaluating all options are imperative to Southwest’s future success," the letter said. "We are committed to realising the substantial opportunity of improving Southwest’s performance with an updated strategy guided by accomplished, best-in-class industry executives and leaders."
A spokesperson for the airline told ch-aviation: "Despite Southwest Airlines’ good faith efforts to meet with Elliott to better understand their views, Elliott has focused on personal attacks on our leadership team and board, conditioning any serious discussions on an immediate CEO change. We remain open to constructive conversations with Elliott, including evaluating additional strong and independent director candidates, as we continue to solicit candid feedback from all shareholders."