Southwest CEO buckles down for Elliott proxy fight: ‘a battle for the heart of our company’

Southwest Airlines CEO Bob Jordan is scrambling to gain investor support while buckling down for a proxy fight as activist hedge fund Elliott Investment seeks to oust him and two-thirds of the board.

“If it’s a fight they want, it’s a fight they will get,” Jordan said in a Wednesday memo to employees seen by Reuters.

Jordan – who became CEO in 2022 after a 30-year career at the company – has been meeting with investors to try to garner their support.

The investor tour comes after Elliott revealed its hand last week, saying it planned to overhaul 10 of the board’s 15 members before pushing out Jordan and Chairman Gary Kelly.

The Southwest boss told staffers he met with investors on the East Coast and West Coast over the past two weeks. He also held meetings with union officials, sources told Reuters.

Elliott, headed by billionaire investor Paul Singer, has gained a reputation for turning around downtrodden companies with a sometimes aggressive approach. Most recently, the firm was integral in pushing out Starbucks CEO Laxman Narasimhan and appointing Brian Niccol, the former Chipotle boss who led the chain’s shares skyward. 

Elliott, which revealed its sizable stake in Southwest in June, has blamed the Dallas-based airline’s “decades-old approach” and low stock price on Jordan and Kelly.

Southwest has cemented its brand as a low-cost airline and investors reportedly worry the activist firm may change the airline’s reputation and scare off customers.

“Don’t be fooled – this is a battle for the heart of our company and our future – your future,” Jordan said in the staff memo. 

Southwest shares are down 6.2% so far this year, trading at $26.70 on Monday.

Its operating costs are up 23% since the pandemic, while its unit revenues inched up just 6%.

Southwest’s operating margin dropped to 0.2% in the first half of this year – down from more than 13% in 2019. 

Meanwhile, rivals Delta and United posted operating margins of 9.5% and 7.4%.

Southwest has been hit hard by its reliance on Boeing, which is under strict regulatory scrutiny after a number of safety troubles.

And like other low-budget airlines, Southwest has struggled to compete in price wars with premium airlines that offer a range of ticket options. 

So the company ditched its longstanding tradition of not assigning seats and announced it will begin selling premium tickets next year with extra legroom.  

Southwest said it will consider board changes, but not a CEO switch. But sources at the airline told Reuters that Elliott is not willing to engage in meaningful discussion until Jordan and Kelly are out. 

Elliott said it plans to call a special shareholder meeting soon to vote on board members, so Jordan is likely calling on investors to prepare for the vote.

Former United CEO Oscar Munoz dealt with a proxy battle of his own in 2016 while recovering from heart transplant surgery. He said he doubts Elliott will be able to overhaul the board.

“With regards to the activists, they do have some good points,” Munoz told Reuters. “How do you begin to counteract those points?”

He said Southwest will have to make some board changes to appease Elliott, but Jordan should be “left to do his work.”

It seems Southwest has already tried to compromise with Elliott, bringing on a new board member with airline industry expertise after the firm criticized the board for not having enough industry vets.

But Elliott said the changes were “too little, too late.”

Two Southwest investors said the hedge fund needs to share more details from its revamp plan.

Elliott expects their changes to drive Southwest’s stock to $49 a month within a year, which would represent more than an 85% increase. But it hasn’t shared specifics, besides the leadership replacements.

Lisa Silverman, senior managing director at global risk consulting firm K2 Integrity, said it would be risky for Elliott to call a special meeting since investors often vote with management.

But Jordan emphasized that the special meeting is “hypothetical and speculation.”

“Elliott is running a predictable playbook intended to…make you feel that they are in charge,” Jordan said. “They are not.”

With Post wires