Southwest Airlines capitulated to activist investor Elliott Management. They’re cutting legroom and will be charging for seat assignments. They’re scaling back growth plans. But most importantly to align with the investor’s real objective, they are selling planes and in some cases leasing them back in order to generate cash for stock buybacks.
Elliott said from the beginning that they were interested in Southwest’s “Unlevered Balance Sheet.” They saw a company that could load up on debt. That can fund share buy backs.
Now here’s Southwest Airlines CEO Bob Jordan during the airline’s earnings call last week,
We’re committed to extracting every dime out of that value,” Jordan told analysts during Southwest’s fourth quarter earnings call. “And we’re using the cash proceeds to buy back stock and deliver value to our shareholders and to modernize the fleet and lower operating costs.
Monetizing the fleet means selling planes to fund buybacks, and leasing some back (loading up the airline with new costs) to fund buybacks which are euphemistically referred to as “deliver[ing] value to our shareholders.” That was the American Airlines plan in the late 2010s, and it didn’t out well for them. American CEO Robert Isom complains about the legacy debt and interest costs dragging down his performance today.
Everyone took Elliott seriously, wondering if they had a real plan to improve the airline, noting correctly that the airline has underperformed and failed to maximize its assets. Observers suggested fairly that current management doesn’t deserve to stay and execute on its own turnaround plan – without ever questioning the seriousness or sincerity of Elliott’s own plan. Yet they told you from the beginning what it was, and we’re seeing it play out in real time.
There’s nothing wrong with using profits that can’t be invested at an above-market rate of return to buy back shares. Returning such funds to shareholders is great for the economy (it lets the money be invested in more beneficial ways) and is responsible stewardship of resources (share counts shouldn’t only go up!). Borrowing money to fund buybacks is risky, and Southwest is placing itself in a worse growth position and worse position with its balance sheet to appease short-term investors. That strikes me as unfortunate.
Did Southwest hire Doug Parker and I missed it?
I thought “borrow heavily to buyback stock while leaving your airline unprepared for ANY slight downturn” was his idea?
How does the company benefit from taking out floating rate loans and handing the money to shareholders? Is there some magic to having higher debt? To me this looks like adding risk. If you want to do that, just sell reverse fuel hedges where you pay double the actual price increase.
Investment firm does mob-style “bust out” that strips the cupboard bare & ultimately destroys the company…er “monetizes assets & returns value to shareholders.”
Shocking!
Pray thee tell, when has a corporation NOT capitulated to Wall Street?
I’ll tell ya, but they’re nearly all bankrupt. And by ‘Wall Street’ you really just mean the ‘ownership’ class (the ‘majority’ investors, not us lay persons with a few shares here and there or in an index fund). I suspect @Andy S or one of ‘those guys’ would add ‘globalist’ but like as a slur.
On the airlines, I certainly haven’t forgotten all those stock buybacks during the pandemic (great for executive bonuses!), though the airlines were supposed to not ‘force out’ their crews… ‘profits over people’ and ‘too big to care’ yet again. Please, rush to defend them: ‘It’s just business’
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Bob’s too busy buying back stock with borrowed money to even know who his ultra-premium, lifetime highest revenue margin customers are.
There are likely dozens of 5 and 10 million milers flying Southwest who don’t even know it…because Bob and SWA don’t. What a shame
@Captain Freedom — Crazy right? I’m starting to think customer ‘loyalty’ isn’t what it used to be. It’s almost as if, we, the passengers, are not the actual customers… perhaps, it’s shareholders. Hmm.
I fail to see how borrowing to buy back shares is a sound business practice. For that matter, I see stock buybacks as GE inspired financial engineering that destroys companies.
Buybacks do one thing. Enrich today’s shareholders. And punts the costs into the future.
Worked out well for AA seeing as how their share price is lower than when they were doing buybacks in the prior decade.
Penny wise, pound foolish.
@Thomas – the evidence doesn’t even support buybacks enriching current shareholders. There may be a very brief modest bump in share price, but it’s ephemeral. And that makes sense – the company gives up cash exactly equal to the value of the shares they’re retiring. Shareholders owned that cash which is given up!
@Thomas:
Also see, for example, (Mc)Boeing.
Or Red Lobster.
Or back in the day when “junk bonds,” “greenmail” & “corporate raiders” were all the rage, Carl Icahn’s many highly levered “acquisitions,” including TWA.
@Howard Miller — This guy gets it.
Oh! Do Iacocca next! At least the Ford Pinto only killed a few people at a time. For Boeing, their thirst for profit came at the cost of hundreds per flight. I won’t soon forget Lion Air or Ethiopian–and before anyone suggests otherwise, it was not the pilots’ fault–it was Boeing–the company plead guilty to criminal fraud conspiracy for 737 Max in 2024. But, hey, at least Iacocca restored the Statue of Liberty in the ’80s, which we’re probably going to have to give back to France soon anyway. Oh well. It was nice while it lasted.
Hey, this is now the American way: devil take the hindmost. It certainly does not sound like what Southwest is doing will improve customer service, their infrastructure or lead to higher wages for its employees. In the worst case they’ll be looted and left a shell. And think of stock options for the executives, which can be far more valuable with buy backs. There are reasons why a corporation doing this used to be called a criminal activity.
This reminds me of Oversimplified if anyone watches that:
“It’s clearly a trap”
“And I’m falling for it!!!!”
@L — YES. Now that is a top-shelf internet reference.
I’d also have gone with “I like the cut of his jib…”
Yep this strategy started with the MBAs in the 80s. The MBAs have ruined countless number of companies but they ensure that they make a fortune before the fall.
More proof the SWA is dying. Poor Herb!!
@1990 Hahaha glad someone got and appreciated that and an A+ reference as well! (also oops bad habits typing in my moniker)
@George N Romey He’s bit of a controversial figure right now but at least in this regard when Elon said he hires people in spite of a MBA, not because of one he may have been onto something
You gotta love the corporate raiders: Swoop in on a great company that’s in a bad patch, screw the company over long term and flee with gobs of profits, leaving behind the shell of the company you invested in in the first place. It’s like the Midas touch except with feces instead of gold.
@GeorgeNRomney:
Hear! Hear!
That, plus the legalization of stock buybacks in 1982 (under Reagan) after their having been outlawed in 1934 (in part as a remedy for 1929 Market Crash & resultant Great Depression) is another key element that cannot be glossed over in any future financial policy making, which, sadly, won’t occur until the next financial meltdown.
It’s just a matter of when that happens?
Not sure that completely outlawing stock buybacks is advisable or feasible, but meaningful changes to eliminate the worst abuses & excesses is desperately needed.
@Howard it’s not necessary to ban stock buybacks, only to disincentive the pump & dump (oops) activist investors by heavily taxing stock buy backs that are funded by leveraging the balance sheet. A company could be hugely successful and use profits for a stock buyback instead of a dividend to pass earnings back to shareholders.
Shareholder value is a concept developed by Icahn, Soros and others of that ilk to put an attractive name on pillaging a generally sound business for a quick personal payout.