Has Received Overwhelmingly Supportive
Feedback about Call for Leadership Change
Responds to Company's Adoption of
Shareholder-Unfriendly "Poison Pill"
Reiterates Measures Necessary to Improve
Performance
Letter is available at
StrongerSouthwest.com
WEST
PALM BEACH, Fla., July 8, 2024
/PRNewswire/ -- Elliott Investment Management L.P. (and its
affiliates, "Elliott"), today sent a letter to the Board of
Southwest Airlines Co. (NYSE: LUV) (the "Company" or "Southwest")
summarizing the feedback received and key events that have occurred
since the publication last month of Elliott's initial letter and
presentation calling for leadership change.
According to the letter, the feedback Elliott has received is
overwhelmingly consistent with its perspective that the Company's
performance is unacceptable and leadership change is required to
return Southwest to its once-leading position in the industry.
Elliott noted that the actions of Southwest's Board of Directors
and management team since its Stronger Southwest materials were
published have only solidified the case for leadership change.
According to the letter, these actions included adopting an
antiquated and shareholder-unfriendly "poison pill" to prevent
Elliott from increasing its stake above 12.5% on July 3, and appointing a new director to the
Board today who appears to have been chosen in part due to his
support for the Company's status-quo leadership and plan. These
actions demonstrate how profoundly out of touch Southwest's Board
has become with shareholder sentiment and with the reality of the
situation, said the letter.
It is crucial, Elliott wrote, that the Board understand that
Southwest's leadership has already lost the trust of its
shareholders, and that shareholders simply do not believe this
Board and management team are capable of devising and executing a
bold new plan to turn around Southwest.
Elliott again outlined the following path to a higher-performing
future for Southwest:
- Enhance the Board of Directors
- Upgrade Leadership
- Undertake a Comprehensive Business Review
Elliott indicated that it is open to collaborating with the
Board on a path forward, but absent alignment Elliott intends to
move expeditiously to give shareholders a direct say on the
necessary leadership changes.
The letter can be downloaded at
StrongerSouthwest.com.
The full text of the letter follows:
July 8, 2024
The Board of Directors
Southwest Airlines Co.
2702 Love Field Drive
Dallas, Texas 75235
Dear Members of the Board,
We write to you again on behalf of Elliott Associates, L.P. and
Elliott International, L.P. (together, with its affiliates,
"Elliott" or "we"). The purpose of today's letter is to summarize
the feedback we have received and the key events that have occurred
since the publication last month of our letter and presentation on
the urgent need for leadership change at Southwest Airlines
("Southwest" or the "Company").
Since publishing our views on June
10, we've had the opportunity to engage with shareholders,
equity research analysts, industry executives and current and
former employees. Many new institutions and individuals have
reached out to us, providing us with new sources of insight and
information, and this trend is continuing. The feedback has been
overwhelmingly consistent with our perspective that the Company's
performance is unacceptable and that leadership change is required
to return Southwest to its once-leading position in the
industry.
The actions of Southwest's Board and management team since we
published our views have only solidified the case for leadership
change:
- On June 26, Southwest announced
significantly reduced unit revenue guidance for the second quarter,
continuing its disappointing trend of industry-lagging revenue
performance (which appears to have become a habit). This
announcement marked the eighth guidance reduction in the
last 18 months.
- On July 3, this Board put its own
self-interest ahead of the Company's by pursuing the entrenchment
strategy of adopting an antiquated and shareholder-unfriendly
"poison pill" to prevent Elliott from increasing its stake above
12.5%.
- And today, the Board announced that it had appointed a
handpicked new director in a clear attempt to entrench itself and
the current management team, thereby expanding the size of the
current Board to 15 members. Among the criteria for selecting this
new director was clearly that he would be supportive of Southwest's
current leadership and status-quo approach, as he noted in the
announcement that he was "look[ing] forward to supporting the
Company's strategic direction."
These actions – and in particular the adoption of the "poison
pill" – demonstrate how profoundly out of touch Southwest's Board
has become with shareholder sentiment and with the reality of the
situation. Contrary to the Company's statements, Elliott is not
seeking control of Southwest. Quite simply, we are seeking to
strengthen oversight, upgrade management and improve Company
performance. Preventing shareholders who do not support the
Company's failed leadership and oversight from purchasing
additional stock reflects exceptionally poor governance and
underscores the immediate need for accountability at Southwest.
This is the worst kind of governance – a shield for failure and a
sword for nothing except the fees of advisers who propose these
anti-shareholder devices.
In light of these actions, we have become increasingly concerned
by the "self-help" half-measures that the Board appears to be
contemplating and adopting, none of which will do anything to allay
the lost credibility of Southwest's management. Elliott does not
make calls for leadership change lightly or without regard to
potential consequences. In this instance, given the long record
of falling short and the deep loss of confidence in Southwest's
leadership among shareholders and other constituents, it is simply
untenable for the same Board and management team to continue to
lead Southwest.
Shareholder Feedback Supports Leadership Change
The feedback we have received since releasing our materials on
June 10 underscores a profound lack
of confidence in Southwest's leadership, strategy and performance,
and has reinforced our conclusion that Board and leadership change
is necessary to put Southwest on the right path.
Since the release of our letter, we have spoken with numerous
shareholders representing a significant percentage of Southwest's
shareholder base. While these conversations have been confidential,
we can characterize the sentiments expressed by these shareholders
as being overwhelmingly supportive of leadership change. This was
well illustrated by the public support for our campaign offered by
Southwest shareholder Artisan Partners on June 12, when it called on the Board to
"reconstitute itself and upgrade the Company's leadership such that
it can objectively assess the best path forward for Southwest's
shareholders, employees, and customers. We believe this process
needs to commence immediately."
Other conversations echoed the feedback we received in the
shareholder survey we commissioned before publishing our views.
Below, we have included a representative sample of perspectives
shared by some of Southwest's largest investors as part of the
survey, with such sentiments having been confirmed in our most
recent discussions:
"The CEO is a headwind to a turnaround. Firing
him is the tailwind." – Top 10 Active Shareholder
"I would rate them as the worst-performing
management team in the airlines. This was a Company that has
destroyed more value based on their own inaction than anyone else
in the industry. They need to go." – Top 10 Active
Shareholder
"They need a new look across the board and you
are only going to get that with [a CEO] who is not from Southwest…
This is a classic example of where a disruptor stayed in the
original model as the industry passed them by and now they have a
problem." – Top 10 Active Shareholder
"I have zero confidence this team can get this
right and certainly not in the timeframe that is needed. I rarely
call for wholesale change at a company, but that is what is needed
here." – Top 10 Active Shareholder
"Having the current CEO drive the process for a
new strategy is not a good idea. I think that means we get glacial
change and even if they say they are going to become SpaceX there
is still going to be a fairly material overhang in the stock
because of skepticism about the execution. This is a good time for
the change." – Top 10 Active Shareholder
"Would you ever see anyone issue a press release
that says '35 year veteran of the company to drive significant
strategic, operational and financial turnaround,' which is what you
would have to believe is possible if you think that Bob Jordan is the right CEO. You need a really
different leader to right the ship." – Top 10 Active
Shareholder
"I don't think this is the right CEO to lead the
company and I would view his removal positively… Is this the leader
you think is able to lead the company into the transformational
change that is needed? I don't think so and I am not sure other
investors do either. I would be surprised if they did." – Top 10
Active Shareholder
"So it is really [the CEO] has not done a good
job running the company and what they have in front of them is
considerably different than the job he came into, so this really is
a natural time for a leadership succession. The Street would be
widely supportive of a change." – Top 10 Active
Shareholder (emphasis added)
In short, shareholders are demanding change now, and Elliott
remains committed to providing them with a clear choice between
continued industry-lagging performance under an incumbent
leadership team that has repeatedly failed to deliver on its
promises, versus fundamental leadership change involving new and
proven airline industry executives capable of returning Southwest
to its rightful place as an industry leader.
Other Constituents Have Also Expressed Deep Concerns with
Southwest's Leadership
In addition to hearing from shareholders, we have received
feedback on our views both publicly and privately from some of
Southwest's employees. For an illustrative example of the feedback
we've heard, consider the sentiments expressed by SWAPA's
leadership on July 1:
"We see the numbers, not just every quarter when
we have the board meeting here, but we know where the trajectory
has been. Then actually when we meet with Bob Jordan and Andrew
Watterson, we bring these concerns up… We have years of
disdain from leadership, and that's how labor has been treated… I
mentioned the word disdain before and I'm going to say it again
because that's the only way that really we can describe how labor
has been treated and SWAPA and our data-driven analysis has been
treated. It's been disregarded. And here we are with an activist
investor basically saying everything we've said… Right now we just
can't [get behind the Company] because we're again disdained and
there's very little concern right now at the C-suite, you know,
outside of their jobs. There's not a concern for the employees. And
that's something we can never forget and really won't." – SWAPA
Leadership, The SWAPA Number Podcast (July 1)
In addition to this sort of public commentary, we have also
received a deluge of unsolicited private expressions of support
from individuals representing themselves as current and former
employees of Southwest – many of whom were in strong agreement with
our analysis of the Company's recent performance and our calls for
change:
"I'm a retired Southwest Captain and I couldn't
agree with you more on the next steps for Southwest… When I started
at Southwest in 1997, it was 'us against the world!' Now it's every
man for himself as our famous culture is dying a slow, painful
death. I believe it can be fixed, and I'm hoping you and your group
can make it happen." – Former Employee
"Not only do I have a vested interest in the
success of the company (my SWA stock has lost over half of its
value) but I have spent 50% of my life flying and working for a
company that was once the envy of every other airline operating in
the world. Without any doubt I agree that a new leadership team is
needed." – Current Employee
"As a SWA employee of more than 23 years, I am
in complete agreement with your analysis. I have been screaming
this for 15 years." – Current Employee
"I am a former 21 year employee retiree and
stock holder of SWA who completely agrees with your perspective of
current senior management at SWA. [Bob
Jordan] has driven the airline into the ground. Thank you
for taking a bold stance and insisting on making some changes." –
Former Employee
This candid feedback is only a small sample of what we have
received so far. We believe sentiment regarding Southwest's Board
and management is particularly negative among these constituents
because, in their view, Southwest's leadership has ignored their
feedback for years and stood idly by as the Company's performance
deteriorated.
The Path Forward
While it appears that the Company is now finally considering
certain piecemeal changes in the face of public pressure from
Elliott, it is crucial that the Board understand that
Southwest's leadership has already lost the trust of its
shareholders. Following years of complacency and – to
paraphrase the Company's own words in announcing its latest failure
to meet guidance – a total inability to adapt to the complexity of
the current airline operating environment, shareholders simply
do not believe this Board and management team are capable of
devising and executing a bold new plan to turn around
Southwest.
In fact, one of the biggest risks we see to Southwest in the
short term would be the announcement by the Board of a package of
half-measures with the objective of further entrenching itself and
avoiding more fundamental change – such as, for example, replacing
the current CEO without running a comprehensive search process.
Such unilateral measures, developed hurriedly and lacking the
buy-in of shareholders, are the very definition of "short-term
thinking" and will inevitably lead to worse performance over
time.
Simply put, investors do not want to see a new plan from the
same leadership team whose record at the Company has been one of
failure. They want new leaders who will bring outside perspectives
and proven expertise to the task of preserving all that was great
about Southwest while charting a higher-performing future for the
airline.
We are calling on the Board to collaborate on the following
changes to strengthen oversight and select the best new CEO to lead
the Company into the future:
1. Board Changes: Elliott has identified
a number of highly qualified former airline executives and other
industry leaders with relevant experience who are eager to serve on
Southwest's Board. These individuals are independent from Elliott
and have a demonstrated track record of value creation in their
former roles. We believe each would be highly additive to the
Board, and unlike the individual added to the Board today, their
appointment would not be conditioned on support for the status-quo
leadership and plan. Rather, they would join the Board with an open
mind and would evaluate the business and its leadership without any
preconceived commitments or allegiances. The Company should
immediately begin the process of working with us to reconstitute
the Board to include these leaders. We believe shareholders will
strongly agree that these individuals' expertise stands in stark
contrast to the existing Board's demonstrated lack of independence
and relevant experience, which has resulted in years of
deteriorating performance with no accountability for management.
Additionally, as we have conveyed to you, we believe the role of
Executive Chairman should be retired and Southwest should appoint
an independent chair from outside the Company.
2. Upgraded Leadership: The Company
should immediately announce a CEO transition and select an interim
CEO who can earn the trust of investors. This person could be one
of the newly appointed Board members. Following a reconstitution of
the Board, Southwest should form a CEO search committee composed
of both new and existing directors to lead a search for the best
candidate to become Southwest's next CEO. We believe the new
CEO should be sourced from external candidates and possess relevant
airline or other transportation industry experience, strong
operational capabilities and a demonstrated track record.
3. Comprehensive Business Review:
Following a Board refresh and the appointment of a highly qualified
and credible new CEO, Southwest would be well positioned to develop
and execute a new strategy to restore the airline to
industry-leading performance. This comprehensive business review
should be led by a new Board-level Business Review Committee. We
believe that fresh perspectives, operational excellence and an
openness to evaluating all options are imperative to Southwest's
future success.
As one of the Southwest's largest investors, Elliott is focused
on the sustainable, long-term success of the Company. This Board,
however, refuses to hold itself and the management team accountable
for the long-term value destruction endured by Southwest's
shareholders. Indeed, the "poison pill" announced on July 3 indicates that this Board feels it needs
protection from the Company's owners, rather than to earn
their support. It is tantamount to an admission of failure.
Entrenchment maneuvers by the Board like this "poison pill" and
the unilateral appointment of a new director handpicked by the
Company's incumbent leaders to support the status quo will not be
effective in the face of the deep shareholder frustration that
exists today. We are open to collaborating with the Board on a path
forward consistent with the framework outlined above, but absent
alignment, we intend to move expeditiously to give shareholders a
direct say on the necessary leadership changes.
We are committed to realizing the substantial opportunity of
improving Southwest's performance with an updated strategy guided
by accomplished, best-in-class industry executives and leaders.
Based on the feedback we have received to date, we believe our
fellow shareholders will be equally committed to supporting that
new direction. We will make ourselves available at your earliest
convenience for further discussions.
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.