December 10th Showdown: Southwest Airlines CEO Faces Ouster—Investor Vote Will Decide The Airline’s Fate

Elliott Investment Management has an 11% stake in Southwest Airlines. They’ve been pushing for changes at the carrier, but their biggest insistence is that current management is out. They’ve already successfully pushed to have Chairman Gary Kelly retire next year. And, thanks to their efforts, have spurred Southwest out of complacency to announce the biggest changes to its business in its history.

  • assigned seats
  • extra legroom premium seating
  • redeye flights
  • route cuts
  • partnerships with other airlines
  • selling planes

Still, Elliott isn’t happy and they’ve called for a Special Meeting of Shareholders December 10th. It’s a proxy fight. Directly, it’s to replace 8 members of the Board of Directors. The result of winning that fight will be to oust CEO Bob Jordan.

Today, after exhaustive attempts to persuade Southwest to implement the necessary governance changes, we are formally calling a Special Meeting to give shareholders the opportunity to elect a completely independent, best-in-class slate of director nominees. Absent a thorough reconstitution of its Board, the story of Southwest will remain one of empty promises and unfulfilled potential. The nominees we have put forward today are uniquely qualified to hold the Company’s executive leadership accountable and ensure that the Company delivers improved results.

We are taking this step today because the need for improved oversight at Southwest has never been more urgent. Following Elliott’s public push for changes, Southwest has responded with a series of long-overdue strategic and corporate-governance initiatives, promising that better performance will follow. However, Southwest’s shareholders have heard these sorts of promises before, and what they need today, at the outset of this attempted turnaround, is an experienced, highly qualified Board to oversee the changes and ensure successful execution. Southwest’s shareholders cannot afford to see – yet again – today’s new initiatives turn into tomorrow’s broken promises.

They are moving to oust the following 8 directors: Douglas Brooks, Eduardo Conrado, William Cunningham, Thomas Gilligan, David Hess, Gary Kelly, Elaine Mendoza and Jill Soltau.

Elliott’s replacement slate is:

  • Michael Cawley former deputy CEO of Ryanair
  • Dave Cush former CEO of Virgin America
  • Sarah Feinberg former interim President of the New York City Transit Authority, former Administrator of the Federal Railroad Administration, and former communications director for the House Democratic Caucus and press secretary at the Democratic Congressional Campaign Committee
  • Josh Gotbaum a veteran of the Clinton administration Treasury, Defense Department, and OMB bureaucracies and head of the Pension Benefit Guaranty Corporation.
  • Dave Grissen who left as Group President of Marriott during the pandemic and serves on the boards of hair salon Regis, as well casino and online betting company Greenwood Racing.
  • Robert Milton former CEO of Air Canada and former Chairman of United Airlines
  • Gregg Saretsky former CEO of WestJet
  • Patty Watson Chief Information & Technology Officer of NCR Atleos and former long-time technology executive at Bank of America who serves on the board of Rockwell Automation

Elliott has been talking to institutional shareholders. I can’t imagine they call for a vote they don’t think they can win. And that would mean that Southwest,

  • ousts its CEO
  • and more closely follows Elliott’s prescriptions
  • which turn the airline into JetBlue and American Airlines – more fees, fewer perks

The activist shareholder prodded Southwest out of complacency and Southwest still hasn’t done quite enough or quickly enough. But the Elliott folks have the wrong people and the wrong prescriptions.

Southwest’s asset is its culture which Elliott doesn’t realize and which is hanging on by a thread (20% turnover, no employee groundswell for management). Elliott wants to appoint the former CEO of Air Canada who served as chair of United. They want to appoint government bureaucrats. And the ex-CEO of a money-losing airline.

Their solution is basic economy and bag fees, eliminating any differentiation for Southwest – one of the only differentiated airlines, which has served investors well. That’s not a recipe for outsized returns.

The basic problem with Southwest Airlines is that they’ve outgrown their model. They were the most consistently profitable airline for decades – racking up 47 straight years of profits, even through 9/11 and the Great Recession – with a simple formula. They had low costs, a single fleet type, and simple customer-friendly policies.

Now, however, Southwest:

  • Is no longer a low cost carrier. They don’t have the Gary Kelly fuel hedges anymore and have expensive contracts with pilots, flight attendants and other work groups. Headquarters staff has grown.

  • They lack long haul flying and partnerships. Southwest takes you to the biggest domestic markets but can’t sell tickets to Europe or other worldwide destinations that customers want to fly. And they don’t benefit from the tickets foreign airlines are selling to their customers. A passenger from Asia can’t land in Los Angeles and transfer on the same ticket to a Southwest flight, or from Europe in New York. That’s a lot of business lost.

    They’re slowly addressing this and have announced Icelandair as a partner, including for frequent flyer redemption, and say more partners are coming.

  • They can’t serve small markets bringing connecting feed to their larger planes. With nothing smaller than a Boeing 737 they can’t serve the markets that other airlines reach with regional jets. Those passengers then can’t flow through the rest of Southwest’s route network.

  • They don’t offer premium products. Customers have increasingly wanted more room and other conveniences, and Southwest hasn’t had anything to offer those passengers. This also cashes out in fewer high income customers than legacy airline peers.

    They’re introducing extra legroom seats which means selling seat assignments (or else these would just be given to passengers boarding first). But they won’t follow the Frontier model of allowing customers to pay for a blocked middle seat, suggesting it’s too complex to do so. That’s a lost opportunity.

  • Customers don’t know about their flights. Southwest largely sells tickets through their own channels only. They don’t sell to leisure travelers through online travel agencies or distribute their fares through Sabre and similar systems. That also means customers don’t directly compare prices, which is great since Southwest generally doesn’t offer the lowest fares… but they also don’t sell restrictive basic economy tickets and they include free checked bags with every fare. However this means that they sell tickets largely to customers living in their major cities who know about the option, but have far fewer customers at their spokes.

    They’re beginning to change this, offering inventory on Google Flights and Kayak and to some credit card rewards platforms. But they need the Biden administration’s rule requiring display of fees with airfare to be upheld in the courts in order to appear competitive in side-by-side displays, since they sell bundled fares and don’t offer a basic economy as a lowest fare product.

It was a great model until it wasn’t anymore. They just can’t keep growing without changes, and won’t return to their historic lower costs. They need to abandon simplicity for growth, but that complexity will mean greater costs too. And that means Southwest is unlikely to be Southwest again, though they still have advantages – primarily that they are still a differentiated product in the market, and with employees who largely don’t hate their jobs and that difference shows against American Airlines and United.

Elliott spurred change, Southwest was too slow to adapt, but they don’t have a better solution for the airline and there’s no reason to believe this slate of directors will help – and plenty of reason to think they’ll erode the competitive advantages that remain at the airline.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. The area I’m most familiar with is Hawaii. They failed there pretty spectacularly. SWA entered the market like someone who moved there and started speaking pidgin when they couldn’t even pronounce the street names. Very boastful, aggressive and clueless. Given Josh Gotbaums record overseeing Hawaiians chapter 11 reorganization way back when I suspect he’ll be supporting cutting out inter island (huge cash drain) and reducing if not eliminating their transpac flying. As you pointed out their business model has it’s limitations, Hawaii was a fine example of that.

  2. Curious…what gives them a right to call a special shareholders meeting? Is there some minimum ownership threshold that allows for this?

  3. I see nothing that Elliot has done that indicates it is in Southwest Airlines for the long haul. LUV stock is not outperforming the S&P 500 since Elliot bought a large stake in June and started causing changes. Maybe a change of a lot of the directors is warranted, but with Elliot’s track record, the change should go to directors that are less likely to be biased toward Elliot. In the short term it may be better to stay with the directors that are currently there. I hope that the institutional investors understand what is at stake. I wouldn’t be surprised if it ends in a pump and dump by Elliot.

  4. A minimum of 10% of the shares calling for the special meeting of shareholders (in Texas and by SEC rules) is required for a shareholder called meeting unless a higher percentage is required by the incorporation documents (per searching on the internet). Elliot bought enough shares to just surpass this threshold.

  5. Two bags fly free is the biggest differentiator for me followed by Paypal Pay-in-4. If that’s gone, it’s going to be hard to win me back. But then again, almost all of my flying is West Coast & Mountain.

  6. which turn the airline into JetBlue and American Airlines – more fees, fewer perks

    More like “Turn the airline into a candidate for sale to American Airlines or United at a tidy profit for Elliott Investment Management.”

  7. The “new” board pretty well tells the story. Elliot is totally clueless on what it will take for Southwest to turn the corner and catch up with their competition. As noted in the article, adding executives with second rate performance at other carriers does nothing to address the issues. Mix in some political hacks and it spells doom.
    End of the day, it’s a cut and run type investment. I feel for the thousands of dedicated and loyal Southwest employees and retirees who accomplished so much.
    Welcome to “life with the mainstream” carriers.

  8. I fly SWA a lot (along with two other big carriers). I am not at all sure about the planned changes, but I will (have to) wait it all out and see what the “bottom lilne” will be for me as Mr. Joe Average Traveler. I’ll then make an appropriate decision to stick with SWA or transfer that portion of my flying business to another carrier. There ARE a lot of choices still out there.

  9. I expect one of two outcomes: breakup of WN and sales of the pieces to the highest bidders or, sale of the complete airline to a competitor like UA or DL. I don’t see AA as having the ability to raise the funds necessary, but I could be wrong.
    All in all, I’m afraid Herb’s dream is about to end. Shame.

  10. Just as AirTran didn’t dovetail into SWA’s Culture, neither does Elliot. I seriously doubt that those who have supported SWA for 50 years were concerned about the open seating. The Elliot group needed to find a “flaw” to rally around. Bean counter “investment firm” is about to send another fine company to the Legion of Forgotten Airlines. I agree with jns, it’s another pump and dump

  11. There are only three words that mattered in the Elliott report: “unlevered balance sheet.” That gave away the whole game. The real crime of current management is that they aren’t selling assets and loading up with debt in order to do a share buyback to boost the stock for one quarter, after which Elliott will be out of the stock and employees and customers will be left holding the bag. The board they’re bringing in will fire the CEO and hire whatever rent-a-CEO Elliott wants to install, and we’ll all be the poorer for it.

  12. This is a pure pump and dump scheme by Elliot management.

    Just a review of the resumes of the proposed directors indicate that they will pillage Southwest for thier own personal gain. They will dump the company for them to make a quick buck.

    Specifically;

    Cush (VX) – sold out to make himself money in spite Branson not wanting to sell it.
    Milton (AC) – sold and broke up Air Canada by selling off Aeroplan and saddling companies with debt for him to have a big pay day.

    They all dont care about Southwest the branding.

    As a very tiny WN shareholder, i will vote NO.

    To all the employee shareholders and retiree shareholders….they will get screwed over this quick pump and dump scheme by Elliot management.

  13. In the longrun Southwest Airlines will suffer the same fate that Sears had when it was taken over by a bad investor. He used Sears as a Tax write-off , ran it into the ground little by little and took all the employees pension money with them. Mine included worked for them for many years and I was robbed of my pension money by this so called Investor.
    I hope SWA will come to its senses and will not allow this.

  14. Once WN purchased AirTran, it moved into a new phase without realizing the transition. Acquiring gates at ATL moved them from point to point to hub and spoke. Denver is another example of a transition to a connection city. The meltdown of Xmas two years ago showed how antiquated its IT system was. The rush to hire after COVID gave away its cost advantage. And management let the “Reserved Seating BS” and Jesus Jetway situation get out of hand. And it sounds like Hawaii was not the best move on the chest board.
    Elliot did an end run to the board room while those in the C-Suite were too distracted calculating the strike point of their quarterly stock options.
    Shame on WN for all (employees, PAX, management, etc) will suffer in the long run.
    At least Ms Joanna had the gumption to call off Carl Icahn at B6.

  15. Making sure all my friends at SWA do whatever they need to do to protect their pensions before the coming Eliot directed chapter 11 sends them to PBGC. The folks at Eliot are incapable of running a basic business, let alone an airline. @Samantha and @Isaac have it right, Eliot will sell and lease back anything that SWA owns, and then sell out before LUV is unable to make all those lease payments and files for bankruptcy

  16. a story Herb liked to tell, mid-80’s or so, somebody in a nice high-dollar suit shows up in Dallas, tells him their airline client was gonna buy stock, take SW over and run it right. Herb jumped up, threw something at him, “I PUT SW TOGETHER, DON’T YOU THINK I KNOW HOW TO TAKE IT APART, FAST!” (maybe some of those words were ‘expletive deleted’) Herb swore the fella tore out of his office, ran down to the elevator, never heard anything else about it. Elliot may discover a hefty part of its 75,000 non-pilot/fa employees have enough SW stock to cash it in, walk away, live comfortably.

  17. How can Southwest appeal to travelers compared to the legacy airlines or the ULCCs without bags fly free? No inflight entertainment, and no food offerings, which may not matter on short flights but becomes a problem on 4-6 hour flights. Without bags fly free, Southwest is just a worse version of the legacies and about the same as the ULCCs. It doesn’t have the cost structure to compete with ULCCs. It doesn’t have the ability to serve thin routes with its fleet and pilot contracts. It’s boxed in.

  18. PS: as to competing with legacies, in addition to no read for thin routes, no food for long routes, it also lacks lounges, upgrades to First, and international reach. For Southwest to succeed it needs differentiation from both legacies and from ULCCs.

  19. Most definitely a pump and dump by Elliot. That is all they know how to do – screw up companies and screw over employees. As for their proposed board members?? Complete and utter failures in their careers. Robots for Elliot.

  20. This part of the story concerns me: “Elliott has been talking to institutional shareholders. I can’t imagine they call for a vote they don’t think they can win.”

    I hope it does not turn out to be be the case.

  21. @David in AZ – I feel even more strongly about this today than when I wrote this yesterday. Southwest’s response is to say no meeting is needed. If the airline were confident in winning the vote, they’d enthusiastically hold it and put the issue to bed.

  22. I hate to say it but I see SWA implementing furloughs in 2025.
    Boeing on strike, huge payroll with new contracts, 737-700’s getting old and can’t get new planes. They’re going to cut somewhere whether that’s employees, stations, non profitable routes, and reduce hours. The old business model is old news and won’t bring profits needed. And eventually, free bags won’t be free anymore. The higher fares over time have already equated a baggage fee.

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