Southwest Airlines didn’t exactly surrender to Elliott Management, but they agreed to put 5 Elliott nominees on a 13-member board of directors in exchange for their dropping the petition for a special meeting of the board.
Already, the airline has given Elliott much of what they were asking for. The activist investor spurred movement on assigned seating, premium seating, partnerships, and redeye flying which are things Southwest had moved very slowly on.
But Elliott wasn’t satisfied. They kept saying it wasn’t enough, but had no answers about what would be. They only pointed out strategies of airlines valued less highly by the market that Southwest wasn’t replicating, like basic economy and bag fees. It seemed like what they were really looking for is levering up the balance sheet to fund share buy backs.
Ostensibly, CEO Bob Jordan stays under the deal with Elliott. He stays at least for now! Will he soon be wanting to spend more time with his family, perhaps elevating airline COO Andrew Watterson to the top job?
The market did not like the combination of news of Elliott’s taking 5 board seats, and quarterly results announcement that included revenue and profit exceeding analyst estimates and an acceleration of their planned stock buyback, and a 2025 forecast of higher revenue. Their stock dropped more than American’s – which lost money. This suggests a disappointment in the Elliott result.
- In fact, shares were up initially on its earnings announcement in pre-market trading and then declined with news of the settlement.
- Going into the announcement, Southwest Airlines shares were no higher than when Elliott made their investment in June – Elliott’s move did not give investors confidence.
- And shares didn’t appreciate after the airline announced changes that Elliott had been seeking, suggesting that the market wasn’t valuing those moves.
Southwest is a differentiated product in a largely undifferentiated U.S. airline industry. Its employees generally like their jobs. And the market has continued to prize that, valuing Southwest shares at a higher multiple of revenue and earnings than other carriers.
During the third quarter earnings call, Andrew Watterson suggests the airline’s revenue management system is beginning to drive better profitability of flights, after a period in which they were hampered by tuning of the new system. Hawaii revenue is growing faster than flights overall, both within the islands and between the state and the mainland. They plan next year to reduce capacity between islands and add redeye flights which will improve connectivity.
Much of the discussions in analyst Q&A, though, were around the airline’s plan to ‘monetize their order book’ by selling planes. This did elicit that they don’t expect to take the Boeing 737 MAX 7 next year.. maybe 2026.
More interesting compared to baseline knowledge about what’s happening at the airline going forward, seating changes and partnerships represent opportunities to further monetize the Chase relationship, but there’s a lot of work to do there, and aren’t in the upside that’s part of Southwest’s presentations. There could be room for more premium credit card. Current card boarding benefits are going to need to change with assigned seating and those discussions are in process.
Southwest’s CEO says they’re committed to cost initiatives, reduced corporate overhead, and that includes looking at employees. They need to be careful here in terms of what’s left of their culture, just as they need to watch what they’re able to preserve in terms of their product differentiation as Elliott’s influence enters the boardroom.
Interesting about Watterson…isn’t he the one responsible for the Hawaii debacle in the first place?
They couldn’t come close to competing with a stand alone Hawaiian Air inter island…..Hawaiian/Alaska will be an even tougher competitor. Transpac wise they certainly are not of the same quality as everyone else in the market. If they can’t sell cheap seats than where are they?
There is a quote floating around about how “80% of their customers prefer assigned seating”. It’s a misleading quote at best to justify the policy change… as it seems their focus is on perhaps customers who LEFT for another carrier and NOT the ones that keep flying them. To the same point… loss of differentiation is going to make it easy for most to basically lump them in with all the legacies.. since they are basically going to operate exactly the same. No doubt Southwest is having a mid-life crisis… but to reinvent themselves in the same mold as all the others … that honestly don’t have the same brand value/culture to lose? Seems like Elliot is more interested in Gordon Gecko’ing LUV instead of actually helping it to succeed.
Putting five people on the board leaves Elliot with only turning two of the rest to get what they want without a fight. The market is responding correctly since the other shareholders will be mostly left out of the ability to make a profit on the stock unless Elliot proves that they are working for the common good.
Body of the article should be updated to reflect the correct spelling of Elliott (it’s with two t’s).
BoJo threw Kelly overboard and that is what satisfied Elliott. A few board changes help but Kelly took the fall. Watterson is going nowhere unless BoJo fails and board members can prove that Watterson can do better…. since he has been leading WN’s network and revenue management decisions, I’m not sure he is going to be a savior.
LUV stock is sinking because investors were hoping for a bigger runup in stock price and that is not likely to happen until WN turns things around financially. The stock is flat YTD which is about right given that nothing yet has fundamentally changed w/ LUV’s finances
“LUV stock is sinking because investors were hoping for a bigger runup in stock price”
This is literally a nonsensical statement, @Tim Dunn
Gary, you have to have some financial and investment experience. The stock went down because the market was pricing in a more significant takeover by Elliott based on their likely winning all the board seats proposed at the Dec 10th meeting. Trust me they had a lot of institutional and large individual investors ready to vote for change. Those that long for the “good old days” at SW don’t understand the airline is under performing financially and investors demand better return than has been achieved. That is all that really matters – not some blogger or long time SW fliers lamenting the likely upcoming changes (which will be more radical and happen more quickly than SW recently proposed).
BTW quit saying Elliott doesn’t know what they want. They have long time airline executives advising them on this transaction.
That’s the goal. Lever the balance sheet to fund stock buybacks. People like him get rich but cash out before the company crashes because it’s starved to pay for the interest on the debt.
@AC – Did you listen to their podcast? The WestJet executive they put up for the board had no ideas for what to do. There’s no free $20 bills on the sidewalk. Southwest has maxed out their basic model and has increased costs. They have to move to greater complexity, which means higher costs. Elliott wasn’t going to return Southwest to its historic valuations. The market knew this. And Elliott’s investment didn’t goose the stock to begin with.
It’s a recipe for disaster in my opinion. Frequent travelers either love Southwest (Love LUV) or they hate it. Some are route or hub captive but for the most part, they have their fan base that still believes they are the cheapest and the best. Those same people are seeing healing miracles on the jetbridges when they aren’t trying to save seats. Those loyal fans also like free bags and doing their thing. If those get taken away they risk alienating their customer base while the majority of other travelers try to avoid Southwest when possible.
@Mike Dunigan – they have both data sets. Existing customers who do fly them would prefer seat assignments. An even higher percent of people who avoid them would prefer seat assignments.
Consumer behavior doesn’t have to match preferences. Plenty of customers fly WN because they’re there, but would have preferred assigned seating. Just like I wish Safeway would have lower prices, but it’s convenient to me, so I still shop there.
I love assigned seats with the option for extra legroom and red-eye flights. I hope that they keep the current free bag policy. If they start charging for bags, then they will just be like every other airline.
I’m guessing that a settlement was reached because neither side was convinced that it could win a proxy fight.
Has Elliott now lost money on its stock purchase?
well, no, gary, it makes total sense.
The evidence of your financial acumen is further highlighted by the fact that UAL stock is up even though you said it would not increase as a result of its buyback announcement.
This didn’t happen overnight. Southwest has run its existing business model beyond it’s useful service life. The entire SMT/BOD has seldom been filled with risk-takers, much less even making a decision.
Southwest has not been a LCC for years, now its shareholders must extract more revenue from the same or fewer seats in an aging 737 fleet.
Never understood why Gary Kelly believed folks flying around with two huge free bags (probably filled with pennies) increased margins. Maybe the first one free, but absolutely no reason not to charge for the 2nd.
Southwest is simply late to the new fare market and it’s going to take some time to recycle it’s business model (and fleet).
has anybody researched how many SW passengers actually fly with TWO free bags? or even ONE?
I say let the idiots on these Airline boards tear each other apart and then we’ll see who is left standing to take over
Ah well. This long-time Southwest flyer (often for last-second work trips) is more likely to move their business travel to Zoom.
I worked with Pierre Breber – he is a sharp guy and will be a good addition to the WN Board.
Personally I would prefer that every company tell Elliott to F- off but none have the cojones to do so.
What is the over/under on Bob Jordan? I give him less than a year.
With regard to customer experience for the non-preboarders, any change is a Great change. Only better things can happen with these changes and the whole lot of old-timers needed to be fired with prejudice – ie. no pension no benefits etc.
“LUV stock is sinking because investors were hoping for a bigger runup in stock price”
Yes, it called cutting your losses and/or taking your profits because its hit the end of its bounce from the “investor action”. Perfectly plausible statement.
“80% of their customers prefer assigned seating”
Would it still be at 80% if the question was phrased “do you prefer assigned seating if you have to pay an extra $50 per seat for it to keep you out of the middle”?