Elliott Doesn’t Know How to Fix Southwest, Nor Does it Likely Care

Mergers/Finance, Southwest

The news that activist investor Elliott has taken a greater than 10 percent stake in Southwest Airlines has been the talk of the town this week. The more discussions I’ve had with people about this — and there have been so many — the more I’m convinced that the cynical take on this whole thing is the right one. Elliott is not here to actually fix Southwest.

Elliott has one goal, and that’s to make a good return for its investors. That is the whole reason that Elliott exists, really. As much as people love to hate Wall St and the finance world, there’s nothing wrong with this at all. The point of the enterprise it to look for opportunties to make money quickly, and it saw Southwest just sitting there, waiting to be taken advantage of.

Slide 18 of Elliott’s presentation shows the real motivation here:

It’s the note in red that matters. The value of Southwest’s aircraft alone exceeds Southwest’s market cap. That means there is value to be extracted.

The other key piece is on slide 11:

Southwest has a lot of cash and not a lot of debt. This means Elliott really can’t lose. If it can get some quick hits through strategy and the stock spikes, it wins. If it can get Southwest to juice the share price by doing big stock buybacks using its cash or by levering up, Elliott wins. Or, if it has to break the thing up and sell it for parts, it wins. There is no losing for Elliott… just for Southwest.

For this reason, Elliott feels emboldened to swing for the fences. I might say Elliott is Southwest’s Rick Dubinsky. You all remember the famous quote from those contentious labor negotiations at United 25 years ago, right?

We don’t want to kill the golden goose. We just want to choke it by the neck until it gives us every last egg.

Elliott doesn’t seem to understand the US airline industry, or at the very least it doesn’t understand Southwest. But it also knows it can’t just go in and rape and pillage, because there will be too much pushback from long-term investors. It’s smart enough to know that investors aren’t pleased with the state of Southwest’s share price. It also knows that labor has called for change at the airline — though that’s usually just during labor negotiations and the rhetoric has quieted down.

With that knowledge, Elliott is trying to find the easiest way to turn Southwest into an ATM. It only has a little over 10 percent of the airline’s shares, so it needs investor allies. And that’s where it focused its attention first.

I don’t know if this has changed, but in the first day or two, I’m told Elliott didn’t even try to talk to labor. It’s entirely possible that labor just wasn’t as important in Elliott’s minds and they’ve gotten there now, but it’s a critical mistake if you’re trying to win hearts and minds.

A look through the deck shows that there is no real plan here. The company threw together more than 50 pages, and it dedicated very few to actually suggesting what fixing can be done. But of course, it has to have an idea of what it would fix, so it can create models that show the potential opportunity. I will try to dive into this in a future post, but honestly, there’s not much to dive into. This just looks like a company that has no understanding of what makes Southwest tick.

Elliott knows that it just needs to get control, so it wants to kick out the board chair and install more independent (read: independent from the airline but connected to Elliott) directors. It then also wants the CEO out. If it succeeds, it can find someone who will push through strategy changes that will make money quickly regardless of long-term impact. That will help push the stock up. If that doesn’t work, it’ll have its own people running the show. They can increase dividends, buy back more stock, or do whatever is necessary to allow Elliott to get out of there quickly with a bunch of money.

Once Elliott is gone, however, then what? Southwest may find itself trying to pick up the pieces if it doesn’t navigate this well. On the other hand, it could be turbocharged if it gets focused, speeds up change, and rallies the entire team to prevent a shift in management. The airline needs to fight, and fight hard while also talking to Elliott behind the scenes to limit the damage.

Early indications unfortunately suggest Southwest isn’t going in that direction. In a sleep-inducing statement, the airline said it would be happy to meet with Elliott and that it “maintains an open dialogue” with shareholders, and… oh I stopped reading. Does anyone think this is how Herb would have reacted? This is not the fabled Warrior Spirit. Bob isn’t Herb, of course. But it’s time to start mobilizing the troops.

Herb Kelleher Arm Wrestling Image via Southwest Airlines

In the end, Elliott is very likely going to come out of this just fine regardless of how this ends. But how Southwest handles this will determine what the airline looks like when Elliott is gone. The pressure is on to preserve what Elliott apparently seems content to destroy.

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47 comments on “Elliott Doesn’t Know How to Fix Southwest, Nor Does it Likely Care

  1. These few words sum up the whole Elliot mess perfectly. “The more discussions I’ve had with people about this — and there have been so many — the more I’m convinced that the cynical take on this whole thing is the right one. Elliott is not here to actually fix Southwest.”

    And that is the point. Elliot like most private equity companies has one goal & that is to suck up the value while saddling the company with mounds of debt that can’t be paid back. The YouTube channel “How money works” explains this concept in a way that it is easy to grasp.

  2. The Elliott development sounds like a simultaneous combination of Coniston Partners and Rick Dubinsky, who independently and on their own, did great damage to United over 20 years ago.

    Combining the two similar threats simultaneously, as Elliott is doing, could do incredible long term damage to Southwest.

    Unfortunately, Southwest’s response so far makes the company sound look a deer in the headlights.
    They had better get their act together quickly

  3. You know, it’s interesting how the scale of that graph is completely distorted. Apparently, $16B is less than a third of $30B.

  4. Their whole schtick is to buy stock in companies in which it detects weaknesses, then pressures the company to make changes to its business (which often requires a change of ceo), then the stock price rises and Elliot Investment Management makes money. Not many companies have actually been ruined by them.

    Yes Paul Singer and his firm are feared by many, but that’s because they’re ruthless at holding executives accountable and will stop at nothing to get what they want (even threatening to blackmail families of board members).

    One thing is for certain, life will soon be living hell for Southwest/LUV management. Elliot will be so active at the company that Jonathan Pollock will soon be seen as the real ceo.

    1. “Their whole schtick is to buy stock in companies in which it detects weaknesses, then pressures the company to make changes to its business (which often requires a change of ceo), then the stock price rises and Elliot Investment Management makes money. Not many companies have actually been ruined by them.”

      As I said… private equity. We all know the damage it leaves in it’s wake.

      As Trent noted, “Southwest ’bout to drop an all-you-can-eat shrimp promotion.” It will be a disaster if Southwest follows the path of Red Lobster or worse Toys R Us.

  5. That the unencumbered DMV of the aircraft exceeds the market cap is shocking.

    Before making bold changes, they need to immediately start better utilizing these assets. Adding red-eyes to the schedule should not be an 18 month process, do it in 18 weeks (or less). Immediately decrease frequency on all the pairs with terrible load factors thereby (1) increasing the loads (and probably the fares) on the remaining flights and (2) freeing aircraft to do the higher margin flying it says it can’t do currently due to aircraft shortage.

    Do this first for some quick wins THEN go bold (e.g., changes to boarding, extra legroom seating, sale of food in flight, etc.)

    1. WN has been dropping less profitable flying already, and they keep making announcements to that effect, so they seem to be on the right track there. Just a matter of doing it quickly enough to make investors (including their new activist) happy.

      As for the other changes you mentioned, they already bumped max fees for EBCI and upgraded boarding drastically, which also increases the value of their credit card program, so stuff seems to be happening there without doing something drastic to the hard product.

      Selling food onboard seems like a solid idea though, given how long the average WN flight is now. Maybe that nets them an extra $100 per flight, which isn’t nothing. Though they retired the espresso and milk combo they sold for a few bucks…which I happily spent drink coupons on…so maybe their passengers won’t bite the way other airlines’ do?

    2. SWA has a big dominant presence in dozens of smaller or medium sized airports and cities.

      Seeing how well hub to hub flights do well for the other airlines, you would think that even a weaker version of that would lead to some high fares and hence good profits.

      Is that the case? Definitely not.

  6. Private equities teeing up Southwest is just another marker of its decline from something special to just another company. And it’s unclear as to how you can really fix this. The airline industry comes with certain intrinsic ills, that you can avoid for a while, if you’re smart, but probably not forever. There are things that you can’t change – or can only address right at the start of an airline. Seniority, how pilots bid for routes, pay structures – effectively impossible to change once they are put in place.

    Think about what we’re talking about in terms of something “big” happening at Southwest. Moving to assigned seating or charging for bags. When that passes for something “big” you know that the industry really has congealed.

    There’s very little about the industry that is seriously contestable relative to decades past. For instance, Southwest owns Midway Airport and that’s not likely to change unless you get something horrible like a pandemic or other external thing that completely rocks the industry. Southwest owns Love Field. It’s super-dominant at all airports in the LA area other than LAX. Etc. But substantial growth – where is that supposed to come from? OK, so looking at Southwest like a cash cow probably isn’t crazy, and leveraging up a cash cow is pretty standard. Southwest is no longer special, it’s rational to treat it that way. Airline historians might mourn that, but it’s to be expected.

    And if Southwest management has allowed the financial side of the house to become attractive to private equities, they have no one to blame but themselves – the same way that Robin Hayes is to blame for having let JetBlue financials molder to the point they became attractive to a shark like Icahn. Management needs to keep shareholders happy. Fail to do that, someone else will take a crack at it.

  7. Southwest was blessed and cursed by stumbling on one of the best business models in the industry from its earliest days. If you go back to the 1970s – 50 years ago – you will be shocked by how many of the basics of the business were put in place by its initial CEO, Lamar Muse, the man largely written out of Southwest’s official histories.

    That’s not to minimize the talent of Herb Kelleher, but Herb took over an airline that had very little wrong with it and was smart enough to not change much – at least about the business model. Fare structure got more complicated, plastic boarding passes eventually went away, etc – but even today, the Southwest business model is recognizably related to that put in place in the 1970s.

    But Herb was still incredibly aggressive and creative. Not necessarily in changing the business model, but applying it – and frankly, having the good sense not to engage in a lot of the stupidity of the industry in the 1980s and 1990s. He largely avoided mergers. Kept financial powder dry. Did not extend the business model (to, say another kind of airplane) because the existing model kept working. And made super-aggressive expansion moves when competitors collapsed and just kept steadily but prudently expanding. Herb was also great at wearing the white hat while actually being a killer, he was adept at knifing competitors while seeming lovable. And Herb really believed in corporate culture, famously, which did work for the company for decades.

    The problem is that within Southwest, the model is regarded as less of a means to an end and more like Holy Scripture and the airline that was once among the most aggressive and creative airlines is now clearly one of the stodgiest. Probably the biggest example of this was the failure to adopt technology in a timely way. In the original model, technology was minimized because IT was super expensive in the 1970s. But by the 1990s/2000s, tech was clearly an enabler – a money saver, yet Southwest was extremely slow in adapting to that. That might be the most obvious canary in the coal mine relative to how slow the company had become to adapt.

    Within Southwest, the changes they do make probably seem earth-shattering, because they amount to messing with the Holy of Holies, the Sacred Model. That’s the problem. The homegrown management team are more like priests tending the sacred shrine than they are creative aggressive business people in the mold of Lamar Muse and Herb Kelleher. Then again, not sure who you would put in charge of Southwest. It’s super easy to screw it up.

    1. You tell the story well and I agree with your conclusion.

      Despite whatever cheap games Elliott is actually playing (take on some debt to juice the stock price), I think that the Elliott (with Artisan support) move is good for Southwest. That horrible, sleepy “maintains an open dialogue” statement too — the HQ next to Love Field is sleepytown, and that needs to change.

    2. Agree with all, but with a special emphasis on the goldwashing away of Lamar Muse. Totally despicable, and reason alone to wish for WN’s demise. (With apologies to the many fine folk employed by WN today.)

  8. Southwest went public in 1971, and aside from airliners.net posters, I think everyone knows what your objectives become when that happens. I wouldn’t expect them to have solutions, anymore than I’d expect to see a horse owner at the Derby decide to hop on the horse and ride it themselves. They just replace the trainer/jockey. None of this takes an MBA to understand.

  9. Keep the best parts of the business model — particularly the use of just 737s and their variants as well as avoiding hub-and-spoke routing — and increase premium services. With the reduced maintenance costs of a single A/C type, adding F seating and assigned seats means they can go after premium customers with a cost advantage to the Big 3. The ULCCs are already doing variations on this. With business travel rebounding and affluent leisure travel on the upswing, catering/pandering to pax who fly 2X a year and bring their own lunch from home is a losing strategy.

  10. CF is right that Elliott doesn’t know how to and doesn’t need to know how to fix Southwest. They do, however, understand the financial dynamics of the airline industry and that is why they have targeted WN.

    Airlines generate enormous amounts of cash as people spending money months in advance for tickets; WN is pushing out its booking window which means they are generating even more cash.

    However, airlines also have large bills and most chew up that cash just as quick as it comes it. WN has similar labor, fuel, maintenance and airport costs etc as other airlines under normal situations but they keep the RATE of cost growth down by rapidly growing. WN’s real financial strength is its balance sheet; like Ryanair, WN has a pristine balance sheet with positive cash (no net debt), a large number of aircraft w/o debt, and very little debt itself.

    Airlines with strong balance sheets and lower expenses than average are often targets for leveraged buyouts. Most airline LBOs don’t work because airlines can’t get their costs down as debt is added and so airline LBOs often destroy the company. Northwest is the best example of an airline that survived its LBO because they cut costs and pushed their fleet even harder and kept airplanes even longer.

    WN is an ideal target for an LBO w/ historically below average earnings, low debt, and lots of assets. Because the primary reason for WN’s earnings have fallen is because of an inability to grow because of Boeing’s lack of certification of the MAX 7 and delivery delays of all aircraft, WN’s turnaround will come – it is just delayed. Ironically, WN Is spending less on capex – new aircraft – as a result of Boeing’s delays so proportionally is not being harmed long-term if it can figure out how to get more cash out of its operation now. When WN starts getting the MAXs it needs and wants, cash generation will soar and they will be even more capable of paying off more debt.

    WN management should take Elliott seriously. WN could well be a very successful LBO target.

    Beyond the operating revenue improvements that have been the subject of much internet discussion, WN can do things to work on the balance sheet and investor side of their business. WN pays a dividend and, while not high, does add value for long-term stock holders. WN could pay a special dividend which will goose the stock price. WN could also buy back stock, something airlines could not do post covid because of federal aid but can be done now. Buying back stock would boost WN’s stock price and also dilute Elliott’s holdings.

    WN can navigate this but they will be pushed to a level of corporate maturity that they haven’t had to face so far in their life.

    1. Buying back stock would do the opposite of diluting Elliot’s holdings. E.g. If there are 200 shares Elliot owns 20 shares and Southwest buys 50 of them back Elliot now owns 13% of the company

    2. Tim, paying a special dividend will not goose the stock price, at least beyond the very short-term. Paying a special dividend removes assets from the company. The value of the company should be reduced by the amount of the dividend.

      This is Finance 101 stuff, Tim.

      1. Jim,
        paying ANY dividend removes assets from the company but companies do it because it provides a reward to stockholders which some investors count on and even require. LUV has been paying a dividend for many years.
        The difference between a regular and special dividend is expectation of a repeat.
        You might want to see what happened to Costco’s stock when it announced its most recent special dividend in Dec 2023, paid it in Jan 2024, and then its stock appreciation in the months that followed. COST is beating market averages for many reasons and their stock management is part of it.

        as to Nick’s comment, a buyback would not increase the share of Elliott’s holdings because all stock of the same class is changed at the same proportion. A buyback could be used to dilute one group’s shares if followed by other representation or treasury/stock management techniques.

        WN does have the ability to impact its stock price beyond operating options.

        Let’s see what do…

        1. Tim, since you’re doing your trick where you use one example to try to prove a point, let’s think about this Costco comparison.
          1. The Costco special dividend amounted to a one-time ~2% “yield.” Do you think that a one-time dividend of 60 cents is going to make a difference and be enough to either “goose” the stock price or pacify Elliott?
          2. Costco has a history of paying “special” dividends based on their exceptional earnings. In your example where a special dividend will goose Southwest’s stock price, do you envision a recurring special dividend like Costco, or is this a one-time thing?
          3. Costco is an exceptional performer, with a history of earnings growth, sales growth, return of capital to shareholders, and a unique niche. They absolutely dominate the warehouse club space, are one of the few companies to beat Walmart head-to-head, and have handled management transitions well. Southwest is a successful airline that has stagnated, is in need of new ideas, and isn’t competing particularly well against Delta and United these days. Costco is best-in-class. Do you consider Southwest to be best-in-class? Do you really consider the Costco comparison to be particularly informative?
          4. Costco’s investor base is undoubtedly baking in expectations of “special” dividends over time into their return calculations because it is a quasi-recurring dividend supported by strong cash flows. You are talking, as far as I can tell, about a one-time dividend. Do you think that a one-time special dividend, forced by Elliott involvement, would really send the same message to investors that Costco’s payment of a dividend, from a position of strength and reflective of strong earnings, is sending?

          Regarding your buyback comment “buyback would not increase the share of Elliott’s holdings because all stock of the same class is changed at the same proportion” — what are you talking about? If Elliott wasn’t a seller, it would change Elliott’s proportion. Again, Finance 101 stuff here, Tim. If there are 10 shares and Elliott owns one — 10% — and Southwest takes $26 out of treasury to buy one of those shares (not from Elliott) and retires it (key here being that they retire it), now there are 9 shares and Elliott owns 11.11%. When they do a buyback, they are buying actual shares in the market, not “changing at the same proportion”, whatever that means.

          I’m headed over to Seeking Alpha to see if I can find an article about how taking cash out of a company makes that company more valuable … I’ll also look for an article that explains “changing at the same proportion.”

          1. Jim,
            I’m not sure there is much value in debating my hypotheticals with your hypotheticals.

            Every available stock technique has been studied across many companies; there is academic literature detailing the effectiveness of each move. Seeking Alpha hardly has a corner on that research.

            The point which I am making and I would hope you would agree with is that Southwest has an enviable balance sheet – the best among US airlines -and they can and should use that balance sheet strength not just to maintain control of the company but to enhance the company’s strength. Even though LUV is not near as profitable as it once was, it can do things that other airlines including JBLU and others that become targets of investor activists cannot do.

            I want WN to fix its revenue issues but I always want to see them take advantage of all of the strengths they have including their balance sheet and an arsenal of stock management techniques that other US companies have used.

            Let’s remember that many were convinced that JBLU would be dismantled and Icahn would take control. A few months later, none of that has happened and JBLU has a plan to turn itself around. I believe WN will be in the same position a few months from now.

            1. Tim, I’m not asking you to debate hypotheticals. I’m also not debating you on the strength of Southwest’s balance sheet; that’s not in doubt and that’s not my point (another Tim trick here — deflect from the actual discussion — like how you threw in some detour about JBLU/Icahn at the end!) I offered some logic questioning whether comparing Costco to Southwest is a useful exercise. You aren’t defending the example you offered. Enough said.

              And you aren’t defending your comments around stock buybacks, which are incorrect and reflect a lack of understanding of the mechanics of how they work. Enough said.

              Tim, I’ve said it before. You get yourself in trouble when you speak beyond your expertise, which is clearly not finance. You didn’t get it right on the mechanics of how buybacks work and you used a really flimsy example to try to justify your position on a Southwest one-time dividend in an attempt to obfuscate from the fact that taking money out of a company does not increase the value. I think you *might* have some value to offer in your understanding of airline operations but I never know what to believe in your writing because I simply don’t trust what you say.

            2. Jim,
              I do appreciate your acknowledgement of my contributions regarding airline issues.
              Companies pay regular and special dividends because they are reducing the assets of the company in order to reward stockholders. If the point was to maximize company assets, companies wouldn’t pay any dividends.
              LUV has paid a dividend for years and has the best dividend yield among US airlines right now and they are maintaining their dividend even though their earnings do not support the dividend they once paid. They are playing the long game.

              Assuming that Elliott wouldn’t submit its shares for a buyback is as hypothetical as my suggestion that they could buy back.

              Any person’s contributions would be enhanced by suggesting alternatives LUV could take to use its balance sheet if you don’t think that the approaches I have suggested are what they might take.

              LUV does have a stellar balance sheet and I trust they will use it EVEN AS they also fix their revenue problem – to the extent they can given Boeing’s issues.

              And, the FAA just said it is investigating two more incidents involving WN flights even as Boeing also is pushing back its schedule to ramp back to the level of production the FAA has approved.

              WN has a big hole out of which it must climb.

            3. Tim, you wrote “Assuming that Elliott wouldn’t submit its shares for a buyback is as hypothetical as my suggestion that they could buy back.” That’s not the point. You’re doing another Tim Trick — misstating the argument. The point isn’t whether Elliott would or wouldn’t sell back their shares. The point is that if there is a buyback, it will affect Elliott’s ownership, based on whether Elliott does or doesn’t sell back their shares (and again with the assumption that the treasury shares are retired). You said that it wouldn’t based on whatever you meant by “changing at the same proportion.” That isn’t how buybacks work — the company buys back actual shares from someone. I’m not taking a position one way or another. I’m correcting a statement that you made that reflects a misunderstanding of the mechanics of how stock buybacks work. If all you are going to do is keep making different arguments to cover up the fact that your statement was incorrect, we can both stop. It truly makes me shudder that investors make decisions based on what you write at Seeking Alpha when your understanding of stock buybacks is that everything is “changing at the same proportion.” You literally could be costing money of inexperienced investors who don’t see through the BS.

              You wrote that “Any person’s contributions would be enhanced by suggesting alternatives LUV could take to use its balance sheet if you don’t think that the approaches I have suggested are what they might take.” Again, I’m not trying to present alternatives. I’m correcting your statement regarding what happens when a dividend is paid. It takes money out of the company and therefore reduces the value of the company. Paying a special dividend, in itself, does not “goose” the value of a company. Dividends paid from a position of strength can be seen as a positive indication on the part of management in the future of a company and that sends signals to investors. But the act of paying a dividend does not increase a company’s value because cash is literally leaving the company. Again, if all you are going to do is keep making different arguments to cover up the fact that your statement was incorrect, we can both stop.

              Tim bingo: incorrect statement about something you don’t understand — check. Adding irrelevant details to deflect — check. Misstating others’ argument — check. Trying to prove a point with one flimsy example — check.

            4. Jim,
              since you brought it up, all articles on Seeking Alpha other than a few blog posts go through financial editor approval and all articles have a link to report a factual error.

      2. Jim, this was an awesome thread putting TD in a bodybag. Wow. I’ve always been skeptical of his takes across many of these sites–they seem to over-simplify everything and frame complex problems as being one-dimensional with easy solutions that airline executives, I guess, just aren’t smart enough to figure out. It’s strange, but I’ve never seen him get exposed like this! Not only was it entertaining, it’s moreso incredibly important, as you pointed out, because some people out there really make decisions with their own money in the market, based on what TD is saying. Wish this guy could have any humility at all to a) understand what he actually knows and doesn’t know, b) stick to what he knows and is knowledgeable enough to talk about, and c) quickly admit when he’s wrong! Absolutely criminal someone with such poor understanding of finances can be writing at a site that many people reference for professional insight (Seeking Alpha). Thanks for this, Jim!

    3. Tim, based on last years load factors, the MAX7 delays are not a problem at Southwest. Based on their load factor issues (12% of routes under 70% load factor) they need fewer aircraft, not more. If Southwest can’t fill the aircraft they have, why do they need to grow?

      1. Bruce,
        as you know, load factor does not equate to profitability because there is a revenue component to how those seats are filled.
        LUV has been struggled with revenue production as soon as the peak demand of domestic covid recovery wore off. Domestic yields have been under pressure across the industry and LUV have struggled w domestic revenue production; AAL has as well but for reasons which CF has discussed separately.
        WN is having to use MAX 8s which it has repeatedly said are too large for many of the routes on its network which is historically much more point to point than the big 3. WN is having to operate more flights in a hub structure which is less efficient from an aircraft use perspective but also from a yield perspective. It is easier to get higher fares if you can fill a plane and only carry the passenger on one segment than if you have to connect them.
        Yes, they have routes they fly which are questionable but they took a whack at the underperformers by announcing the closure of several stations – not very common for WN.

        In addition, in order to keep growing, WN is having to start its schedule earlier and run its schedule later in the day at times which do not generate yields as good as the peak times of the day. IF WN had enough of the right aircraft, they might not grow capacity much more than it is now but they would use smaller aircraft and more of them and get better yields in the process.
        WN guided to a midpoint of 3.5% improvement in yield for the 1st quarter when it reported its 2023 full year financials in January 2024 but ended up closing the 1st quarter with flat RASM.

        And from a cost standpoint, the problem is that WN, like every other low cost carrier has to keep growing to keep unit costs down; airline employees keep getting more senior and if you don’t grow, you don’t add enough new hire, lower paid employees at the bottom of the scale and costs go up.
        WN’s CASM is going up much faster than its RASM in part because it has chosen to settle w/ its labor groups rather than have the employee relations challenges which customers perceive at other airlines. WN’s labor costs will stabilize so this is as much a one time cost hit which amounted to a half billion dollars over the past year; given that their profit was only a half billion dollars, the increased labor costs hurt alot.
        No investor group is going to succeed by suggesting that WN made a mistake in raising labor costs.

        WN needs to increase its revenues and stabilize its costs; getting more of the right aircraft and getting their labor cost increases behind them will position WN well against other airlines that still have significant outstanding labor contracts to settle.

  11. I flew Southwest frequently for many years until there was a period of about 1.5 years when every Southwest flight I took was at least 1 hour late. I switched airlines and since then, have flown WN only a very few times when no good alternative was available. My impressions of Southwest:

    Lethargic
    Set in their ways
    No longer a bargain (fares)
    Too many Operational issues

    I don’t miss them.

  12. It’s a bit ironic, but maybe having a lot of debt isn’t a bad thing for an airline to have if it wants to avoid a Carl Icahn or Elliot style “investor” come in to fix it.

    1. And along with that UA TPAC LF data showing how widebodies in the winter are a problem, American Airlines are suddenly looking like geniuses…

  13. How much exactly is “a greater than 10 percent stake”?

    If it’s something like 10-15%, then do they really have enough influence to replace the board and then leadership?

  14. The headline is true but it is also true that Southwest is broken. Elliott (and other shareholders) are in the business of evaluating companies and making capital allocations based on where they see opportunity. There is absolutely an opportunity to deliver better financial results at Southwest than what the company has been delivering. Elliott is opining that the current management team and board cannot do that. They want better financial results from WN, period. They think that the people, planes and gates should provide it. If the company performs up to potential then it is likely keeping employees and customers happy as well, maybe less happy than they are today but lets say satisfied. The balance between shareholders, customers and employees can be tilted more towards shareholders than it is today.

    Competitive advantage for companies comes from their assets and people.

    It is a fact that WN’s competitive advantage is being eroded by the network carriers and the ULCCs. There may be essays that can be written about the reasons why and the remedies but that is where the company is today.

    If you accept the above, the management team has to be accountable. They have been on the controls for the last 15 years.

    If I was an investor in Elliott and had sway over their actions, would I call them up and ask them to withdraw this campaign? My own answer is NO. Their campaign is not fraught with risk but the weight of the evidence is in their favor.

    Lastly, a point about private equity and Elliott types being cast as out to suck companies dry. Each of us wants the CEOs of the companies that we hold in our 401k to deliver the best possible financial results in the short term while keeping the long term enterprise value of the company intact. If the Southwest CEO called us with their results, we would have two choices. Accept the results knowing that this was the best we could do to preserve the long term value of the company. Or we could go out on a limb and fire mgmt. What if we also knew that there were many other chickens waiting on the sideline who would rush into the stock if they saw a glimmer of improvement. That would de-risk our idea of firing the mgmt team.

    Elliott’s motive is profit. They know that if they even show hints of a rebound with a changed narrative, shareholders would come running into the stock. This set up greatly de-risks their situation. The irony is that pension plans of working class people are one of the largest sources of funding for Elliott and the other chickens. Lets not blame them for making a good bet.

    If there is an imperfection in the system, it is that Elliott is using someone else’s money and charging a ridiculous amount of fees for risk that is borned by those fee paying investors. However, that is unrelated to the point that WN has historically done better and can improve greatly upon how it is currently doing.

    1. I love these types of replies because they seem to be right out of an MBA class… So sterile and in such a perfect vaccum. I’m sorry, but your (and my) 401K is not nor should not be any sort of entitlement to determine the day to day operations at an airline. Nor should even an investment such as the one Elliott has made. If they’re upset at how the company is run, feel free to invest in any of the other many more profitable alternatives. This type of badgering and coup d’état esqe behavior is usually the precursor to a much larger peril for whatever the focus of those investors is.

      That said, Bob Jordan should have been put to pasture for the Christmas meltdown, and the rest of the c-suite and board sacked as well – but the idea that private equity with only a profit motive in mind is no sort of a fix either (see Boeing). Southwest can fix the issues with their model simply by making real world changes to make the flying experience much better with them. If they have to pause the dividend to raise the cash to do it-so be it.

      1. You may think that these comments are from MBA classes but they are not academic. This is how markets work in real life. The people who provided the capital for the airline to go acquire billions of dollars in assets want to get the best return on their investment. They handed the keys to Jordan & Kelly and are holding them accountable. Is their perspective sterile, cold & lacking empathy? Probably… Is it inaccurate? No. Capitalism is ruthless.

        The perspective of the shareholders has to be balanced against employees and customers. This is mgmt’s job one. Elliott (and another shareholder) are saying that mgmt is not delivering a good enough product that keeps all three parties happy. In all the comments made on this forum, there is no pushback on that point. There is near unanimity that WN’s product quality could be better and they are falling behind their competition. This is a multi year pattern of decline not a short term aberration. The weight of the evidence suggests changes need to be made. If the status quo continues, then employees cannot expect their wages to keep up with their peers.

        1. frost,
          WN’s issues are getting lots of coverage on lots of sites and most of those sites have their own reader feedback forums. Social media creates an expectation that everyone can figure out what is wrong and solve every problem.

          you are correct that WN has historically done a good job of balancing shareholder, employee and customer priorities and isn’t doing that well now.

          There is agreement that WN’s profits and stockholder value have fallen because that is factual; there is no agreement as to why this has happened or how to fix the problems as CF notes.

          Many of the suggestions are to undo the core WN product even though those things worked for decades or were gradually changed at points in the past; to think that the core WN product no longer works requires understanding what changed in the last 5 years to make those product elements no longer viable.

          It is clear that many low cost carriers around the world – of which WN is one – are struggling and the common theme for most is not product related; many have different business models than WN. Low cost carriers are built around high rates of growth and they have been particularly hard hit by Boeing’s delivery delays as well as the Geared Turbofan inspections and parts replacement and resulting airplane groundings.

          WN has been saying for years that they do not have enough of the right airplanes flying the right routes because the MAX 7 is not certified, they can only take delivery of new MAX 8s, and their aging -700s are requiring more maintenance to fly a less efficient schedule.

          WN chose to finally settle w/ its employees for new labor costs even though its revenue base is not there to support cost increases while a number of airlines have yet to finish post-covid labor negotiations – and that is costly but part of the balance that WN wants to maintain.

          I would strongly bet that WN has quantified the reasons for its revenue and profit problems and the value of a number of opportunities but Elliott has simply not seen that data.

          WN does have a very strong balance sheet which they can leverage in their restructuring in one of a number of ways. LUV’s market cap is just over half of DAL’s but almost the same as UAL’s and more than AAL even though the big 3 all generate much more revenue.

          The coming months will tell not if Elliott was right in its assertion that WN was sitting on its laurels or if Elliott can force change that WN wasn’t already planning to do.

  15. One point CF made that struck me was the fact that Southwest management is not going to fight real hard against Elliott when it comes to the moves it wants to make at the airline. If we go back to the days of Herb Kelleher and those who started airlines because of a larger vision than just making a profit, an Elliott move would have probably elicited an immediate move to privatize Southwest. Especially after that presentation which by and large, didn’t come up with any real solution to any of the problems at the airline, but made sure that it was blatantly clear that Elliott was going to profit off of any of it.

    Southwest management as it goes on, will own more of the mess especially if Elliott gets dirty and tries to upend the airline for the sake of its bottom line. They should either nip it now before it’s too late (or is it already?) or get ready to deal with the cleanup after.

  16. stock market data from May shows that Southwest stock has moved from having one of the lowest short rates among US airlines to about 5.5%, higher than DAL and UAL.
    Short selling involves betting the price will drop.

    There are entities that believed LUV stock would continue to fall.

    AAL has one of the highest short interest rates at nearly 13% and it has been at the high end of airlines for years.

  17. Will Southwest make it out of this?? I’m not convinced—IF they can navigate this successfully, I believe they will be a much much smaller airline than they are today (Less destinations). I also wonder if how fast this will force Southwest to do updates to there computer systems and how much the route network is going to change if there is major cost cutting going on.

  18. Yes Southwest is a business there to make money. But in all these financial schemes, a business has value because it is delivering a good product, at a good price to customers. There is no business value without customers. These “investors” get a business, suck it dry, and cast off the very things that gave the business its value. We see this in regional banks with great customer services, that get bought out by a big bank, and they promptly cut the very elements that gave the regional banks their value. Southwest is unique with a loyal customer base. Kill the unique aspects, baggage, open seating, changable reservations, and it becomes just another mess, like United and American. How anyone flies Spirit mystifies me, the product and service and price, (fees) is so bad.

  19. Hedge funds don’t exist for the betterment of business. They exist to make their founders richer.

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