I Don’t Understand This Plan, but Elliott’s Showdown with Southwest’s Board Now Has a Date

Any time something happens in this airline industry we love, there’s a good chance I have an opinion on it. And to get to that opinion, I first have to figure out where the company that’s making the move is coming from. I may disagree completely, but it helps me to feel like I understand why something is happening. With activist investor Elliott Investment Management’s attempt to wrest control of Southwest’s board and replace its CEO, however, I just can’t figure out the plan at all. The latest news is that Elliott has called a special board meeting and put out a podcast. I’m serious.

The original plan put forth by Elliott earlier this year was to replace directors on the board so it would then have a majority. It also wanted CEO Bob Jordan gone. Like many investors, Elliott was unimpressed by Southwest’s financial performance and thought it could make good money by installing people who were focused on short term gain.

As it considered its ideal board, Elliott wanted people with more hands-on airline and tech experience to help guide a financial turnaround. In August, Elliott announced that it had a slate of ten directors it would put forward. As it said at the time:

The final group of Candidates includes four former airline CEOs and Deputy CEOs and six Candidates with complementary expertise in technology, hospitality, consumer-focused businesses, labor relations and regulatory oversight, including experience leading organizational change in these areas.

It’s clear what the company wanted, and here’s the list:

• Michael Cawley, deputy CEO, COO, and CFO of Ryanair until 2014, then went to an Irish tourism board but is now retired
• David Cush, CEO of Virgin America until 2016, currently runs a private equity-backed auto repair business
• Sarah Feinberg, Administrator of the Federal Railroad Administration until 2017, doesn’t appear to be working currently
• Josh Gotbaum, investment banker in the early ’90s, Chapter 11 Trustree for Hawaiian until 2005, Director of the PBGC until 2014, currently seems to be mostly a professional board member
• Dave Grissen, Group President of the Americas for Marriott until 2021, currently seems to be mostly a professional board member
• Robert Milton, CEO of Air Canada until 2004, then various roles at the top of AC’s holding company ACE until 2012, board chair at United until 2018, currently seems to be mostly a professional board member
• Gregg Saretsky, CEO of WestJet until 2018, currently seems to be mostly a professional board member
• Patty Watson, the current EVP and CIO/CTO at NCR Atleos which appears to be a banking and ATM tech company
• Eash Sundaram, Chief Digital and Technology Officer of JetBlue until 2021, now venture capitalist and professional board member
• Nancy Killefer, former McKinsey partner who now is a director there and is a professional board member

This is… an interesting list. If you’re looking for people with real, relevant airline experience, you might point to David Cush, Robert Milton, and Gregg Saretsky here. But David — while very successful at getting an exit thanks to the bidding war that developed — never created a financial overperformer at any point during Virgin America’s existence. Robert Milton — successful as the catalyst for bringing Scott Kirby to United — is a financial engineer who split Air Canada into various pieces that took years to fix. And Gregg Saretsky, well he may have the most releveant experience, but I’ll talk about him down below.

While Elliott was putting this slate forward, Southwest clearly felt the pressure. Presumably other investors were grumbling along similar lines, so the airline took action. It announced that it would shrink the size of its board to 12. Current Chairman Gary Kelly would step down at the annual meeting next year, and six others would step down this November. It also changed some of its governance structures. But the board stood behind retaining CEO Bob Jordan.

As part of this, it also brought on two new board members who actually had relevant airline experience. Rakesh Gangwal ran US Airways, but don’t judge him on that. He was the co-founder of IndiGo back in 2006, a low-cost operator that has exploded into being India’s most important airline. He finally left that company’s board in 2022. There are stories about how he can be challenging to work with, but he can bring real rigor to an airline and provide unique perspective.

The other new board member is Bob Fornaro, who ran AirTran until 2011 when Southwest bought the company. He was later CEO of Spirit until 2019. I have a soft spot for Bob since I find him to be remarkably good at running airlines that need help. Every time I’ve interacted with him, I’ve come away feeling like I’ve learned something… even if the conversation never takes the most direct route.

With all of these changes alongside the whole transformation plan, you’d think that investors would be happy. At the very least, you’d think they’d be placated unless the plan falls off the tracks. But as we discussed in last week’s episode of The Air Show, Southwest’s revenue performance already looked decent in Q2, but the airline has only recently become more bullish. There is still a cost issue, but there is a lot to like if you’re an investor.

But Elliott is not that investor. Elliott is increasingly pissed off as the stock has failed to appreciate. It gathered over 10 percent of Southwest’s shares which means it can call its own special meeting. It has now done that, setting December 10 as the date.

Eash and Nancy got the axe from Elliott’s original slate, so now it’s just eight directors that are being put forward with a plan to remove eight more. Presumably Elliott likes Rakesh and Bob. Only three of the six directors that Southwest has retiring in November overlap with Elliott’s plan (William Cunningham, Thomas Gilligan, and Jill Soltau). Gary Kelly is also on the Elliott list, of course. But Elliott also wants Douglas Brooks, Eduardo Conrado, David Hess, and Elaine Mendoza gone. And if it succeeds, then the new board will call for Bob Jordan’s head as CEO.

Now up until this whole exchange, I got it. Elliott is an activist investor. It cares about making its money and then getting out. It cares less about the long-term success of the company than it does the short term gain. That’s fine, but it can’t get others to go along with that plan so it has to straddle a line to make it seem like it’s out there trying to fix the company and make it better for the long run. Sure.

But now that Southwest has made significant changes to the board and governance and put out a transformation plan that, if it works, should result in significant gains, why would other investors be willing to go along with Elliott? We aren’t talking about just a few other investors. Elliott has a little north of 10 percent of the company, so it needs to get at least another 40 percent of shares to vote for its board slate. To be clear, that’s 40 percent of shares that are ok effectively handing board control over to a minority shareholder. I don’t see why I would want to allow that. And this is why I’m so confused about Elliott’s plan.

It just seems like the odds are very much not in Elliott’s favor here. Now, if the airline fails miserably to meet its goals, reduces guidance, things fall off track, etc, then I can see Elliott having a much stronger case. But right now it seems so unlikely that it can get the support it needs. I imagine Southwest is feeling similarly, because it is getting more and more bold with its statements, starting to really fire back at Elliott more than it did initially.

But Elliott just keeps pressing forward, now introducing a brand new podcast — I am not kidding — in which it has its “Associate Director, Engagement & Investment Stewardship” interview the board slate. The first one up is Gregg Saretsky.

Gregg ran WestJet until 2018, and he proudly talks about how WestJet was a Southwest clone. Gregg does have years of good experience, but in this 18-minute interview, he doesn’t say anything about what he’d actually do to fix Southwest. He says that the airline needs to do “a deep dive and looking really critically at aspects of our business.” More specifically:

That would be my advice to folks from Southwest, is: Keep an open mind. The things that you said you would never do, you probably will at some point. But the way you do them is going to be really important, so you don’t damage the culture.

I don’t think I’ve ever heard Bob Jordan say he’ll “never” do something. In fact, I’ve heard him say more than once that you never say never. This just sounds like Gregg has been given talking points and isn’t even familiar with what current management is saying at the airline. It’s not a good look.

Like I said, this all just confuses me greatly. Why is Elliott making this move when it seems like it would be so challenging to get the support it needs? Why would these board candidates put themselves out there, especially the airline industry people like Gregg who are probably burning bridges by doing the bidding of an activist investor?

I don’t see how this special meeting will help the share price if Elliott fails to win, and the chances don’t seem great for Elliott to be able to pull out a victory. So, what is the company going to gain by going through this exercise?

Thoughts are always welcome, just head to the comments….