Southwest hasn’t broken under the weight of its activist investor, Elliott, but it has now bent. It appears that the airline is making a calculated move to save itself from being unable to control its own destiny with a human sacrifice. Whether this will work or not is unclear, but it should at least buy the airline time.
Southwest says it is doing a “comprehensive board refreshment,” which, I believe, in Herb Kelleher’s day would mean somebody ran out to the store to get more Wild Turkey and cigarettes. But now it’s a little different. This means a few things, as current Board Chair Gary Kelly detailed in a letter to shareholders.
Here is what’s happening, and it is a pretty big deal.
- Former CEO and current Board Chair Gary Kelly will retire after the 2025 annual meeting
- Six of the other 14 board members will retire:
- David Biegler (Former CEO of Southcross Energy Partners)
- Veronica Biggins (Managing Partner of Diversified Search LLC)
- Sen. Roy Blunt
- Dr. William Cunningham (Former Chancellor of The University of Texas System)
- Dr. Thomas Gilligan (Director of Hoover Institution at Stanford University)
- Jill Soltau (Former CEO of J.C. Penney)
- Four new board members will be added, three of which will be given “due consideration” from Elliott’s list of nominees
- The Executive Committee structure will be eliminated and a new Finance Committee will be formed
The general idea here is pretty clear. Elliott wanted Gary’s head, and they got it. Elliott also wanted ten new board members out of the fifteen seats, or two-thirds. It now may get up to three out of a smaller twelve-person board, or one-quarter. Elliott also wanted CEO Bob Jordan’s head, but the board has said it is strongly backing him in his current role.
In other words, this is not everything Elliott wanted, but Southwest hopes it might be enough. Elliott, however, made that clear in a statement it issued regarding the moves that it most certainly is not.
We learned yesterday, which was made public today, that nearly half of Southwest’s Board of Directors had decided to resign based on shareholder feedback. In our experience, this is unprecedented.
We are pleased that the Board is beginning to recognize the degree of change that will be required at Southwest, and we hope to engage with the remaining directors to align on the further necessary changes.
The need for thoughtful, deliberate change at Southwest remains urgent, and we believe the highly qualified nominees we have put forward are the right people to steady the Board and chart a new course for the airline.
Like I said, this makes it pretty clear. Elliott likes these changes, but it’s not going to just accept them and call it a day. These guys have never really seemed interested in operating through compromise. They are going to keep pushing and pushing and pushing. Just ask the government of Argentina.
Of course, from Southwest’s perspective, that may not matter. If I’m Southwest, I know Elliott won’t compromise, but I also know that Elliott only owns about 10 percent of the company. For Elliott’s plans to work, it has to convince other investors to go along with its plans, and that isn’t going to be so easy.
My guess is that Southwest was hearing from some investors that they weren’t happy and may have been considering supporting some of what Elliott wanted. So Southwest made some pretty sweeping changes on the board level to try to appease those investors. These are investors that probably don’t have much love for Elliott anyway, but they like the general sentiment. They want their investment to be worth more than it is.
With the changes Southwest is making now, it can probably help pull investors off the fence and more into the airline’s camp. It makes it harder for Elliott to get the votes it needs… at least right now.
Of course, this is not a permanent thing. Southwest needs to start churning out better results. The pressure is on, and it is time to perform. Southwest CEO Bob Jordan and COO Andrew Watterson certainly know this. Their clock starts in a couple weeks when Southwest has its investor day where it says it’ll release an updated business plan.
If the airline can start to see real improvement and the stock price soars, Elliott will presumably cash out and walk away. But if not, Elliott will continue to pressure for improvement until it finds enough investors to agree. If nothing else, this move by Southwest at least buys the airline some more time.
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32 comments on “Southwest Tries to End Elliott Threat By Sacrificing Gary Kelly”
I struggle to understand how Southwest’s current board is full of so many directors without airline experience. I agree that with Southwest’s current poor returns its stock holders compared to the S&P500, change was needed or Elliot may have gained more support from current owners.
I have wondered that, too, and not just in this case. Take a look at IBM’s BoD:
https://www.ibm.com/investor/governance/meet-the-board
This is how most BoDs are run. Look at Delta’s, they have only 2 people, besides fast Eddie, who have any expertise in aviation. BoDs are just cushy favors that companies pass out as favors to their fellow rich friends.
Directors don’t necessarily need experience in the particular sector that the company operates in. They just need experience in business, finance, and/or government relations. Management needs experience in the airline industry.
What are the chances their Hawaii flying sticks around? Or at least that it’s scaled way back?
It is also possible that Gary and a bunch of board members came to the conclusion that they cannot keep Elliott out of the board room where it is certain they will find where all the skeletons are buried and do not want their name associated with WN when Elliott starts making changes that could irreparably change the WN that has worked.
One need only look at the impact of LBOs including at Northwest to know the next few years could be very unpleasant for Southwest management.
One of the problems with activist investor groups like Elliott is their only goal is $$$ Vs actually knowing how the business works & improving it. In the end if Elliott doesn’t get what it wants in the way it wants it, watch them destroy the airline from the inside out.
Meanwhile, over in Atlanta, Ed, the myrmidon of the servant of Satan called Guillaume, makes sure his board of directors is compliant and pliant by imprisoning their families in a dungeon located somewhere deep below Concourse A at ATL.
What skeletons were in the Northwest closet?
Pretty sure Cranky already touched on this, but in the end, isnt this just going to take away anything that makes Southwest unique?
Short answer, yes. In the eyes of activist investors uniqueness doesn’t pay the bills & therefore that element must go. It matters not the industry as the only thing that matters is shareholder returns. The problem is if you don’t stand out, you are likely to be ignored by the public & companies like Elliott are blind to that simple fact.
Look what is happening to Hoonigan and Donut Media in the YouTube / Car space. Private Equity bought in, squeezed out every bit of profit they could. The talent was like Nope, and all left. Now the channels are going to crash, no income, no return.
Once WN goes to assigned seats there is nothing unique about them left. The only think left is to compete on price and schedule, and in my humble, anecdotal, experience, they have not been competitive on either one for the past ~6 years.
Its too bad. I liked Southwest.
WN’s biggest value proposition to me is their network structure. Living near an airport that is a spoke for every other airline, it’s nice having non-stops to 31 destinations with WN vs the 3-5 the other airlines offer.
in addition to Sean’s good comment, the reference to NW wasn’t that there were skeletons in their closet but that they paid a high price for being the target of a leveraged buyout.
NW was generating lots of cash which meant that they could service the debt that the LBO forced on it but debt service reduced the ability to do a whole lot of other things.
WN is a bit different in that it is still generating cash but has a very strong balance sheet – one of the best airline balance sheets in the world.
The real reason why Elliott went after WN is because they clearly did much better financially in the past; it is simply hard for any person in business to understand how a company that has been so profitable in the past and so instrumental in shaping the low cost carrier segment of the global airline industry could have lost so much financial momentum. The answer that Elliott has, which remains to be seen if it will work, is to clean out the board in an upheaval that will spread to the executive ranks. The strategy changes that Elliott will push are not clear beyond what WN has said it would already do but people lose their job when companies don’t perform.
Thanks Tim.
Let’s not forget about “Barbarians at the gate” on Nabisco or “Wall Street” with the fictional Bluestar Airlines. Both were stories or sub plots involving LBO’s & just how destructive they become. Two recent events in the retail world I’m well aware of are Toys R Us & Bed Bath & Beyond.
We all are aware of what private equity did to those companies & who is to say that Elliott wouldn’t try to do the same to Southwest as Wall Street has a strange way to pick winners & losers.
I think it would be more difficult to liquidate a large airline than the retail chains you mentioned. The value of retail was their real estate holdings, spread all over the country which could be sold to any number of entities. Southwest’s assets are its 800+ aircraft which are not as easy to sell off. There probably isn’t demand for that many used 737s in the global market and if that many aircraft hit the market, the resale value would plummet to next to nothing.
Good comments, Tim.
I have a thought about one of your questions. It may not be right, but that hasn’t stopped me in the past. LOL
Your question is: “… it is simply hard for any person in business to understand how a company that has been so profitable in the past and so instrumental in shaping the low cost carrier segment of the global airline industry could have lost so much financial momentum.”
My response, right or wrong, is that market conditions have changed. The current market seems to favor carriers such as Delta that offer a real choice between a premium and less premium experience. If one looks at history, companies such as Sears were once dominant. And it can be argued that Sears was the Amazon of its day. Now, Sears is a shadow of its former self. Why? Because it didn’t adapt to changing market trends.
Another point that presents itself in all of this is that “activist” investors tend to focus only on the short term. That was the thinking that led to a lot of airline bankruptcies, IMHO. One of Southwest’s strengths over the years has been its focus on the long term. But that can lead to inflexibility. The keys are to find the right balance between the short term and long run, and to do so without compromising a company’s focus on what sets it apart from its competition.
Sears didn’t fail because it didn’t adapt to market trends. Sears failed because Eddie Lampert wanted to sell the real estate assets and didn’t care at all about the retail business. Adapting Sears to current retail market trends wasn’t even considered as a business strategy.
My recollection – perhaps wrong – was that Sears and K-Mart were already not doing great before Eddie Lampert came along to feast on what was left.
They weren’t doing great but crazy eddie absolutely hollowed them out and cannibalized them to line his own pockets after his initial attempt to play warren buffet and become a star CEO failed. Sears really should have been no worse off than Macy’s currently is now, and probably should have fared better on their strengths in appliances and hardware. But one walk into either a Sears or a Kmart for a decade revealed dated rot and that not a penny was going into modernization or upkeep where it mattered
I agree with your assessment of how things turned out.
Sears & Kmart weren’t doing great. I’d argue that the seeds of their demise date back to at least the early 90’s, with Kmart’s lackluster responses to Walmart/Target and failure to adapt to supercenters that had 1/4-1/3 of the floor space on grocerys, not just general merchandise, and with Sears’ failure to adapt to big-box competitors like Home Depot & Lowe’s, plus the huge underinvestment into the stores’ appearance that tyou mentioned. However, both chains could have still been turned around to the point that they would be surviving (perhaps not “thriving” or market leaders, but at least surviving). Instead, Lampert looted them like an 8 year smashing the piggy bank in search of coins needed to buy a hot new toy.
Hi Oliver,
You are correct on Sears. There are old retail & mall blogs I was reading & commenting on at that time & nearly everyone agreed that Sears was in trouble from refusing to adapt to the Amazon revolution. Kmart was already struggling from moves they were making in years prior & fast Eddie thought it was a good idea to merge the two to create a larger company he could suck increasing value from.
Herd a great comment on CNBC when this was announced… “You can’t make a good company by merging two struggling ones.”
That quote also applies to the failed JetBlue/Spirit merger
Not necessarily. For JetBlue it was a way to quickly increase their fleet of A320’s & gain entry into certain markets where JetBlue’s presence was small to nonexistent. Would it have worked? I personally believed so, but others disagreed.
Sears was on the way out well before Eddie Lampert came on the scene. They failed to invest in their business, and tried to rest on their laurels. They didn’t keep up with new trends in supply chain management, for example. They didn’t invest in online capabilities. They were out of touch with retail market trends by the early 2000s, if not earlier.
Sears could have been Amazon. They were shortsighted. I know, I worked there for a few.
So did my parents as they both worked in the NYC buying offices. In fact my dad commented that Sears was losing it’s edge as early as 1970!
I get SWA is making changes but they need to do something more innovative to truly win. Simply turning on basic economy and/or assigned seating is not enough. It might grab a few customers along the margins (really price sensitive & never-SWers because of no assigned seating) but it’s not going to change the story. I would’ve loved to see something like a euro-business section (blocked middle) that can flex in size and the rest of the cabin remain unassigned seating. This could’ve been really efficient and unique. Then offer a checked-baggage-at-belt-time guarantee to encourage more bag checking and faster turns like the “old” days. Only give 1 free bag…2 is pretty ridiculous and there is no way they are monetizing that 2nd bag effectively in the market.
FWIW I think their turns are way too slow today considering they have unassigned seating AND free checked bags. Yes they tried and failed to reduce them by just forcing tighter scheduling, but they need a stronger ops program on that. I’m sure larger aircraft has something to do with it, but shouldn’t have that much of an impact. US airlines are so enamored with larger aircraft (so easy – spread fixed costs over more customers!) that they don’t think of their markets and how difficult it is to fill those seats. Then they continue to grow the fleet making the problem even worse. A huge chunk of the SWA network is fairly thin routes and they should’ve looked to a similar size replacement to their 733s like the A220 instead of increasing the % of their fleet on 7M8s that are significantly larger.
Gary Kelly brought this upon himself. He lived half of his career living off the coattails of Herb. Kelly was a great accountant, but a terrible CEO. He gutted the foundation of SWA. His focus was always financial, not operational. Never understanding the correlation of the two. When living on borrowed time of uninvested operations eventually the cracks will grow. That failure to invest has resulted in a Christmas meltdown and the continued poor performance since. Kelly surrounded himself with yes men while growing middle management to astounding proportions, nearly 100 vice presidents at SWA. So, good riddance to Kelly even if the Elliott replacement is worse at least it comes with honesty of gutting of SWA in the open as opposed to Kelly’s gutting while hiding behind Herb legacy.
All of this! ??
The question marks were meant to be exclamation. Sorry ?
Southwest ought to tell Elliott to get lost.
I read the notes on Elliott. I get that people do not like “vultures.” Who would like anything with that name?
That said, there is a real benefit that is overlooked (ok, I do not mean “Paul Singer gets rich.”). The benefit is that these firms instill discipline in markets and in lenders. Argentina did not go into a crisis because it was well managed. Argentina went into a crisis because it was terribly managed by its own leaders (and voters). Governments and pension funds around the world lent Argentina money, which its politicians then stole and wasted (AerolineasArgentinas, anyone?). Government supported industries are populated with no-show and no-work jobs. When someone compares Singer to a mafioso, I might remind them that Argentina’s politicians are often actual mafioso, and the government has hit squads. Who are the goons in this scenario?
There are two key terms to the Argentina deal. First, all disputes must be heard in the Southern District of New York’s Federal Court. That puts the dispute into at least a neutral territory, rather than one in which the creditor government can just appoint new judges and run ruff shod. Second, ALL creditors had to agree to any deal. All means all. That’s a term a government would accept only if they were so irresponsible as to be desperate (see the comment about “Argentina did this to itself.”). You will not see other governments act similarly if they can avoid it.
Lastly, this dispute went to the US Supreme Court 3 times and to the US Court of Appeals for the Second District one additional time. Singer won them all. In short, that might shed some light on whether Singer is a terrible human or whether Singer smartly invested in assets that, if handled well, would produce a higher return.
Argentina is now getting onto the right track, thanks in large part to a massive upheaval long required. The people there know that. So, maybe we need to think about who is elected, their level of responsibility, and what those people did with all the money they borrowed (stole, and never returned), rather than simply saying “That guy got rich.” He did indeed, but the money he used to get rich came from investors who saw an opportunity to recoup some of what had been taken from them.