Discloses Approximately $1.9 Billion Position
Calls for Upgraded Leadership and
Comprehensive Business Review
Believes Southwest Stock Can Achieve
$49 per Share, a 77% Return
Full Letter and Presentation Available
at StrongerSouthwest.com
WEST
PALM BEACH, Fla., June 10,
2024 /PRNewswire/ -- Elliott Investment
Management L.P. ("Elliott"), which manages funds that together
have an investment of approximately $1.9
billion in Southwest Airlines Co. (NYSE: LUV) (the "Company"
or "Southwest"), today sent a letter to the Board of Directors of
Southwest.
The letter substantiates Elliott's view that Southwest's poor
execution and leadership's stubborn unwillingness to evolve the
Company's strategy have led to deeply disappointing results for
shareholders, employees and customers alike.
Southwest's rigid commitment to a decades-old approach has
inhibited its ability to compete in the modern airline industry,
Elliott said, and this ethos pervades the entire business with
outdated software, a dated monetization strategy and antiquated
operational processes. Elliott's letter asserts that the Company's
failure to modernize is underscored by Southwest's December 2022 operational meltdown, which
stranded more than two million travelers over the holidays.
Elliott noted that Southwest's share price has declined by more
than 50% over the past three years and is now below the levels at
which it traded in March 2020 during
the depths of the COVID pandemic. The letter also highlighted that
disappointing financial performance has cost each frontline
employee tens of thousands of dollars on average in the form of
lower profit sharing and declines in the value of employee-owned
stock.
As a result of this poor performance, Elliott believes that new
leadership is required at Southwest, which represents the most
compelling airline turnaround opportunity in the last two decades,
according to the letter.
As part of its "Stronger Southwest" plan, Elliott outlined three
recommendations to improve the Company's performance:
1) Enhance the Board
2) Upgrade Leadership
3) Undertake a Comprehensive Business Review
By executing on the Stronger Southwest plan, Elliott believes
the Company can return to its rightful position as an industry
leader, including generating best-in-class margins and compelling
returns for its shareholders. In doing so, Elliott argues that
Southwest's stock can achieve $49
per share within 12 months, representing a highly attractive 77%
return during the period.
Elliott is convinced that Southwest's issues are addressable
with the right leadership and a comprehensive, unbiased evaluation
of available opportunities, and looks forward to collaborating with
the Company to restore accountability and best-in-class financial
performance for the benefit of Southwest shareholders, employees
and customers.
The full text of the letter follows:
June 10, 2024
The Board of Directors
Southwest Airlines Co.
2702 Love Field Drive
Dallas, Texas 75235
Dear Members of the Board:
We are writing to you on behalf of funds managed by Elliott
Investment Management L.P. (together with such funds, "Elliott" or
"we"). Elliott has made an investment of approximately $1.9 billion in Southwest Airlines ("Southwest"
or the "Company"), representing an approximately 11% economic
interest and making us one of the largest investors in the
Company.
Southwest is a legendary airline with a proud history. Since
starting service in 1971, Southwest revolutionized the airline
industry with an innovative business model built on operational
excellence and a commitment to providing customers with a low-cost
alternative to the legacy airlines. This winning strategy generated
decades of success and allowed Southwest to become the premier U.S.
domestic airline, with 47 consecutive years of profitability in a
highly competitive and challenging industry. Along the way,
Southwest became a beloved brand among customers and a motivating
career opportunity for its employees.
Today, however, poor execution and leadership's stubborn
unwillingness to evolve the Company's strategy have led to deeply
disappointing results for shareholders, employees and customers
alike. Southwest's share price has declined by more than 50% in the
past three years and has now fallen below the levels at which it
traded in March 2020, during the
depths of the COVID-related travel shutdowns. And while the U.S.
airline industry is seeing record revenues and peer airlines are
enjoying very strong profitability, Southwest's 2024 EBITDAR is
expected to be nearly 50% lower than 2018 levels. In addition to
negative returns for shareholders, this disappointing financial
performance has cost each frontline employee tens of thousands of
dollars on average in the form of reduced employee profit-sharing
and declines in the value of Southwest stock held by employee
retirement plans.
After 18 months of intensive research, we are convinced that
Southwest represents the most compelling airline turnaround
opportunity in the last two decades. The significant investment we
have made reflects our conviction that, with the right leadership,
Southwest can regain its status as an industry-leading airline. In
this letter and the appended presentation, we lay out our
perspectives on how Southwest can reclaim its status and achieve
the success that Southwest's shareholders, employees and customers
deserve.
Southwest Today
Southwest's rigid commitment to an approach developed decades
ago has inhibited its ability to compete in the modern airline
industry; this ethos pervades the entire business with outdated
software, a dated monetization strategy and antiquated operational
processes. This failure to modernize is vividly underscored by the
December 2022 operational meltdown
that was caused by the Company's outdated technology, which led to
Southwest stranding over two million customers over the
holidays.
Southwest's Executive Chairman and its CEO, who have spent a
combined 74 years at the Company, have presided over a period of
severe underperformance, and they have demonstrated that they are
not up to the task of modernizing Southwest. Since his appointment,
Southwest CEO Bob Jordan has
delivered unacceptable financial and operational performance
quarter after quarter, resulting in seven negative guidance
revisions in the last 17 months. Operational metrics are pointing
in the wrong direction: Southwest's unit costs – a core priority
for a low-cost carrier – have ballooned, while unit revenues have
lagged peers. Even as the Company's performance has deteriorated,
Jordan has demonstrated a surprising level of complacency,
describing each quarter as "great" or "strong" while the earnings
outlook continues to fall. Despite the management team's assertions
that it is "absolutely committed" to bringing per-unit costs under
control, management guided costs meaningfully higher for 2024 and
revised cost guidance upward again in April.
Southwest's Board has failed to hold management accountable for
poor execution and has been unable to catalyze (or permit) the
necessary strategic evolution. Instead, the Board has reinforced an
insular culture and outdated thinking in the face of indisputable
evidence that change is required. The Board includes no directors
with external airline experience, and a majority of the independent
directors were recruited by Executive Chairman Gary Kelly. This Board has in turn selected a
management team that, of the eight most senior executives, includes
only one executive with experience at another airline; the rest
have worked at Southwest for an average of over 25 years. The
mandate from the Board has been clear: Keep doing things the way
they have always been done.
The lack of accountability is best reflected in the Company's
response to the December 2022
operational meltdown. In a clear display of poor leadership, CEO
Bob Jordan declined to testify in
front of Congress after the meltdown, despite attending a company
rally just 40 miles away in Baltimore the prior day. No senior executives
were terminated for their role in the meltdown. Most concerning,
and in blatant disregard for the affected customers and employees,
the Board nearly doubled the compensation of all key executives in
the year after the incident.
We believe that new leadership is required at
Southwest. While Southwest has a proud history, that history
is not an argument for supporting poor leadership and sticking with
a strategy that no longer succeeds in the modern airline industry.
Rather, Southwest's legacy necessitates evolution and change
to regain industry leadership for its customers, employees and
shareholders. As one of Southwest's largest investors, we are
committed to delivering the necessary leadership changes to achieve
this goal.
A Stronger Southwest
In the accompanying presentation, "Stronger Southwest," we
outline our views on the challenges the Company faces today and our
recommendations to drive improved performance, which we summarize
below:
(1) Enhance the Board of Directors:
The Board should be reconstituted with new, truly independent
directors from outside of Southwest who have best-in-class
expertise in airlines, customer experience and technology.
(2) Upgrade Leadership: Southwest
must bring in new leadership from outside of the Company to improve
operational execution and lead the evolution of Southwest's
strategy.
(3) Undertake a Comprehensive Business
Review: Southwest should form a new management and Board-level
committee to evaluate all available opportunities to rapidly
restore the Company's performance to best-in-class standards. This
review would modernize Southwest's strategy and operations with a
focus on increased customer choice, improved cost execution and
updating outdated IT systems, among other opportunities, and it
should leverage the fresh perspectives of the new directors to help
formulate the optimal go-forward plan for Southwest.
By executing on the Stronger Southwest plan, we believe the
Company can return to its rightful position as an industry leader,
including generating best-in-class margins and compelling returns
for its shareholders. We believe Southwest's stock can achieve
$49 per share within 12 months,
representing a highly attractive 77% return during the period.
For the Company's frontline employees who have a meaningful
economic stake in Southwest's success, we believe the plan would
result in substantial incremental long-term value from additional
profit-sharing payouts and appreciation of employee-owned
stock.
The Stronger Southwest plan puts the Company on a path to more
sustainable performance that will better serve customers, employees
and shareholders. The plan modernizes Southwest's approach to
ensure that its offering is aligned with customer preferences. It
upgrades leadership to improve execution. It drives the efficiency
required to continue offering low fares. And it facilitates the
necessary investments to run the reliable operation that customers
and employees expect.
Next
Steps
Southwest became a leading airline by innovating and executing.
Today, Southwest's failure to execute and evolve has led to
deteriorating performance, and the Company simply is not living up
to its legacy of efficiency and top-tier results. Nevertheless, we
are convinced the issues the Company currently faces are
addressable with the right leadership and a comprehensive, unbiased
evaluation of the available opportunities.
We look forward to collaborating with Southwest to restore
accountability and best-in-class financial performance for the
benefit of the Company's employees, customers and shareholders. To
that end, we will make ourselves available for a meeting with you
at your earliest convenience to discuss these issues in greater
detail and to align on the changes that Southwest needs in order to
deliver on its significant potential.
Sincerely,
John
Pike
Partner
Bobby Xu
Portfolio Manager
About Elliott
Elliott Investment Management L.P. (together with its
affiliates, "Elliott") manages approximately $65.5
billion of assets as of December 31, 2023. Founded in
1977, it is one of the oldest funds under continuous management.
The Elliott funds' investors include pension plans, sovereign
wealth funds, endowments, foundations, funds-of-funds, high net
worth individuals and families, and employees of the
firm.
Media
Contact:
Casey
Friedman
Elliott Investment Management
L.P.
(212)
478-1780
cFriedman@elliottmgmt.com
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SOURCE Elliott Investment Management L.P.