By Svea Herbst-Bayliss
NEW YORK (Reuters) – Elliott Investment Management has initiated a boardroom battle at Southwest Airlines (NYSE:) with a plan to replace 10 out of 15 directors in an effort to remove the airline’s chief executive and enhance performance, the hedge fund announced on Tuesday.
This development marks an intensification in the ongoing dispute over the leadership and strategic direction of the airline. Over the past 52 weeks, Southwest’s stock price has dropped by 24% as it works on implementing a turnaround strategy that includes initiatives such as increasing legroom, transitioning to assigned seating, and appointing a new board member in July.
The individuals nominated by activist investor Elliott for the board include former airline CEOs, consultants, and executives such as David Cush, the former CEO of Virgin America, and Robert Milton, the former CEO of Air Canada.
Southwest Airlines stated that its board will assess Elliott’s proposed nominees as part of its ongoing board refreshment process.
Shares of the airline rose by 1.5% in premarket trading on Wednesday.
Elliott emphasized that these candidates offer shareholders a choice between the existing board and a new one that brings relevant expertise, innovative thinking, and accountability.
Last week, Elliott disclosed in a regulatory filing that it holds a 7% beneficial ownership stake, nearing the 10% threshold required for an investor to convene a special meeting. Including derivatives, the firm’s total interest amounts to approximately 11%.
The hedge fund is advocating for the replacement of both CEO Robert Jordan, who has been in the position since 2022, and Executive Chair Gary Kelly, the former CEO preceding Jordan.
In response to Elliott’s investment, Southwest implemented a shareholder rights plan, commonly known as a poison pill, which would trigger if an investor acquires 12.5% or more of the stock. This plan enables other shareholders to purchase additional shares at a discounted rate to thwart a potential takeover.
“We anticipate that investors will be hesitant to vote out the current leadership without first considering a future plan, particularly given Southwest’s recent proactive measures that challenge Elliott’s portrayal of stagnancy,” Jefferies remarked in a note prior to the official announcement.
The airline anticipates that third-quarter unit revenue will remain flat or decline by up to 2% year-on-year, while non-fuel operating costs are projected to increase by 11% to 13%.
In recent quarters, earnings have been under pressure, partly due to delays in plane deliveries from Boeing (NYSE:), impacting revenue and exacerbating cost and pricing pressures amid an industry-wide surplus in the domestic market that has led to lower airfares.