This story was updated Wednesday morning with comments from Southwest Airlines.
A much-anticipated boardroom battle is afoot at Southwest Airlines. Elliott Investment Management, the activist investment fund owned by billionaire hedge fund magnate Paul Singer, announced its intention to “move forward expeditiously” to replace as many as 10 directors on the Southwest Airlines board as it ratchets up its months-long campaign to shake up the Dallas-based carrier’s leadership and business model.
In June, the activist fund announced it had taken a $1.9 billion stake in Southwest, representing an economic interest of roughly 11% of the airline. But only 8.2% is in common stock, according to an amended Schedule 13D filed Tuesday with the SEC. Elliott plans to call a special meeting of shareholders but, to do that, it needs to own at least 10% of the company’s stock, according to Southwest’s bylaws.
“Elliott is making clear that it is moving quickly, at a brisk pace, to both put forward qualified director candidates and to amass 10% of the common stock,” says Keith Gottfried, CEO of Gottfried Shareholder Advisory, a shareholder activism defense firm. “It is positioning itself to request a special meeting to replace directors, possibly in advance of Southwest’s investor day in late September.”
“Today’s announcement represents a key step toward implementing the urgent changes needed at Southwest,” Elliott said in a statement released Tuesday evening. The game plan is three-fold: revamp the board; replace the Dallas-based carrier’s chairman and CEO; and conduct a comprehensive business review.
Prior to Elliott’s announcement, news of its plans was first reported by the Wall Street Journal.
On Wednesday morning, Southwest Airlines said in a statement that its board and leadership team “remain open to conversations with Elliott to discuss ideas to drive shareholder value, and the board will evaluate Elliott’s proposed nominees as part of its ongoing board refreshment process,” adding that “no immediate action is required of shareholders.”
Before putting forward its preferred slate of candidates for the Southwest board, Elliott says it conducted “a months-long global search for the best individuals with the optimal mix of backgrounds and expertise.”
The resulting short list includes four former airline CEOs and deputy CEOs and six candidates with “complementary expertise in technology, hospitality, consumer-focused businesses, labor relations and regulatory oversight, including experience leading organizational change in these areas.”
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“When nominated, these candidates would give shareholders a choice between the company’s existing board, which has delivered poor returns for shareholders and has not held management accountable for Southwest’s unacceptable performance, or a new board that brings relevant expertise, fresh thinking and accountability,” said Elliott.
Elliott’s preferred nominees are:
- Michael Cawley, the former deputy CEO, COO and CFO of Ryanair
- David Cush, the former CEO of Virgin America
- Sarah Feinberg, a former senior official at the Department of Transportation and former head of the Federal Railroad Administration
- Josh Gotbaum, a longtime advisor to companies and labor groups and the former chapter 11 trustee of Hawaiian Airlines
- Dave Grissen, the former Group President of Marriott International
- Nancy Killefer, a former McKinsey Senior Partner in the firm's Consumer and Retailing Practice and current Board member of Meta
- Robert Milton, the former CEO of Air Canada and ACE Aviation Holdings and the former Chairman of United Airlines
- Gregg Saretsky, the former CEO of WestJet
- Eash Sundaram, the former Chief Digital and Technology Officer of JetBlue
- Patty Watson, the current EVP and Chief Information & Technology Officer at NCR Atleos and a longtime technology executive
“Elliott’s proposed board candidates have impressive qualifications and experience,” says Gottfried. “However, it is possible that this announcement is less about the backgrounds of the candidates and more about Elliott demonstrating how prepared it is to request a special meeting if Southwest does not accede to the changes that Elliott has called for.”
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Elliott first went on the offensive in June when it revealed its massive economic stake and promptly sent a 51-page presentation to the airline’s board, laying out a turnaround plan that included assigned seats, premium seating, baggage fees, and replacing both Southwest CEO Bob Jordan and chairman of the board Gary Kelly.
“The Southwest Airlines board remains confident that the airline has the right leadership team in place to evolve the business and to lead Southwest Airlines forward,” the carrier said in its statement on Wednesday.
From the beginning, Elliott has been relentless in insisting that Southwest’s leadership must change. “They certainly have not backed off those demands in any way or softened them,” says Gottfried. “In an activist situation, it’s not uncommon that, as a consequence of the activist involvement, the end result is a leadership change. What’s unusual about this is that it’s the lead demand.”
In early July, Southwest adopted a shareholder rights plan—also known as a “poison pill”—where any investor acquiring 12.5% or more of the stock would trigger the ability of other shareholders to acquire more stock at a steep discount in order to block a takeover.
Also last month, Southwest Airlines laid out a plan for sweeping changes to its business model, including ditching its half-century-old open-seating model, introducing a premium “extra-legroom” product, offering red-eye flights and more.
Southwest said its board has appointed “a total of eight new independent and highly qualified directors over the last three years, including the recent addition of experienced airline executive and entrepreneur Rakesh Gangwal.”
Gangwal has extensive airline industry experience, as the co-founder of IndiGo, India’s largest airline by fleet size and passengers carried; the former president and CEO of US Airways Group; and previous executive roles at Air France and United Airlines.
Not good enough, retorted the investment fund. “This failed leadership team’s announced initiatives—obvious attempts at self-preservation—are simply not credible. Too little, too late is not a strategy. It’s time for new leadership,” Elliott said in a statement.
Over the past year, Southwest shares have eroded in value by 24% versus a drop of 21% in the S&P 500 Passenger Airlines Index.
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Now Elliott is barreling toward the 10% threshold of common stock needed to call a special meeting. “When you look in the back of the [SEC Schedule] 13D on Elliott’s recent stock trades, you see how much common stock they’ve accumulated just over the past weeks.” Shareholders are required to file a Schedule 13D if they acquire more than 5% of a company’s outstanding equity securities.
In addition to stock acquired by the investment fund itself, Elliott’s 13D filing reveals that some of its handpicked candidates for Southwest board seats have also been accumulating Southwest stock of late, ranging from a $37,349 investment by Mr. Milton to a $498,081 investment by Mr. Cawley.
What’s clear is that the gloves are now definitely off. “You almost have to look at this as though it was a political campaign, where opponents look for ways to criticize each other,” says Gottfried. “In order to win the hearts and minds of the shareholders, you need to be able to make a case for change. What Elliott is trying to do is make a case for change.”
“Elliott has been telling shareholders publicly that it thinks that this could be a $49 stock if all its changes were made,” continues Gottfried. (Southwest Airlines shares were at $25.42 on Tuesday after the stock market closed.) “That’s a pretty significant jump from where they are now. And so, if you’re an institutional shareholder, you might be starting to think that Elliott can get this done.”
