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.
Braniff once led the industry in profits, Eastern was once the largest U.S. Air Carrier , Pan Am was Americas chosen airline, Piedmont and USAir were among the the most profitable in their heyday…the list goes on….the point? No Airline is bullet proof…..this sounds like the Carl Icahn playbook all over again. Can’t see SWA evolving into a competitive legacy airline, Hawaii is a good example of what happens when they try to compete with legacy carriers head to head. The other option of being the low cost alternative no longer works. Can’t really see a place for their business model, their hubris seems to have come home to roost.
Spirit 2! Did the hire Al Checci?
@JohnW — Well said.
From a business perspective, Southwest had net profits for nearly 50 consecutive years, due in no small part to their strategic jet fuel price hedging, until the pandemic, then things started to fall apart, and haven’t really recovered for them since.
Or, it was because they stopped serving honey roasted peanuts around 2018. Yeah, it was probably the nuts—those were delicious! A real shame. Oh well.
Greed is Good!!
Just to be clear, there is no difference between share buybacks and dividends, except the former is better for the shareholder under current tax law (by delaying the payment of taxes). We expect a company trading for $X per share will drop to $X-1 after declaring and issuing a $1 dividend. The shareholder can then use the $1/share dividend to buy additional shares. If the company uses the same cash to buyback shares, we expect the shares to trade at $X (less cash, less shares). In the first case you have more shares at $X-1 valuation. In the second, you have the same shares as before at the $X valuation. If you didn’t have to pay taxes on the dividend, your net value is the same. You own the same % of the company in either case. Add taxes on dividends, buyback are better for the investor
A classic pump and dump on a grand scale. SW will load up on monthly obligations (leasing aircraft instead of owning them) and/or debt to pay for stock buybacks. Once the buybacks are underway, the stock price will go up. Everyone who owns SW stock should prepare to dump it. As soon as the price goes up, sell because those left owning the stock after a major sell off are going to have part ownership in a debt ridden and/or obligation heavy company that will not be worth as much as it is now. Those who hold tight, be prepared for a wild ride. I can see one advantage: Elliot will no longer be in control of the company. Those who sell at the relative high point should be able to buy in at a lower point in the future if they want to have stock in SW. Dividends are distributed equitably to stockholders who shares are due them. Buybacks are usually best for those who are willing to divest quickly.
@jns — Thanks for the heads-up.
Relatedly, crypto feels like one big ‘rug pull’–except it’s completely unregulated and our President has his own ‘coin’–yup, that’s totally ‘normal’ stuff. Nothing to see there.
Since our government is about to completely ‘de-regulate’ and will basically return to the ‘spoils’ system, there will likely soon be a lot of surprised ‘bag holders’ (otherwise known as ‘victims’ of white collar crime) as P&Ds (or worse) proliferate the formerly regulated traditional markets.
I mean, I suppose it goes hand-in-hand with the Court allowing outright bribery, so long as it’s called a ‘gratuity,’ and that Congress persons can trade on insider information, so long as they don’t explicitly say that they did.
Remind me, why must we re-learn such harsh lessons from the past, and when did we stop prosecuting securities fraud? Oh, look, it’s almost ‘2029’… 100 years since…
Southwest touted its balance sheet but missed the reality that there is a balance sheet that is too good, esp. for an airlines which require large amounts of cash.
The very cyclical and seasonal nature of airline profitability requires financial flexibility but WN wasn’t even susceptible to downturns even in the best of times.
Wall Street raiders look for opportunities to extract cash from a company. WN is now nowhere near its previous levels of profitability but still has a pristine balance sheet. WN is falling victim to Wall Street because WN was run too good for the industry it was in for too long.
Unlike companies like Northwest that were the target of leveraged buyouts, WN can survive for years with much more debt and still have a modern fleet and great financials.
SWA will have an all MAX aircraft fleet in 5 years, they have a surplus of 175 seat aircraft, it now makes up the majority of the fleet, which contradicts their operational priorities. This is due to the need to continue fleet upgrades, and the lack of certification of the MAX7 to date. They are taking advantage of resale values of relatively new -800 aircraft that still have high value before they depreciate further, that can be replaced directly with a new MAX8, to extract the value from them. With the deal they are receiving from Boeing on MAX aircraft they can utilize that capital for significant down payments for an aircraft with a warranty, and significant operational costs savings. It is a smart move to use someone else’s money to pay for your fleet renewal. While saving 14%-16% or more per operating hour for every MAX. Seems like a smart return. SWA after years of exceptional dividends and buybacks, from GK and crew for 2+ decades, has been forced to reinvest into the airline core the past few years and that will continue at a lower level for the next couple, huge sums of capital. I would expect 2025 will see moderate yield growth over 2024 profitable year. However 2025 will still be suppressed by fleet retrofits and product updates, but 2026 will see a substantial increase in yields, with 2027 likely returning to pre-covid yields. I wouldn’t be surprised if Southwest returns to the top of airline stocks and performance before the end of the decade.
Southwest was the only major US airline that truly focused on their employees as much as their customers and all their decisions were based on continued success over the long term. I don’t understand why Southwest ever paid any attention to Elliot and his “demands” when it’s obvious that these changes will slowly destroy their decades-long success and put them on a path to mediocrity. At most Elliot acquired what, about 11% of the stock? I would have told him ” Thank you for your investment but we don’t need any advice on how to run a successful airline. “
Elliot is driving SWA to the ground