Southwest Airlines shareholders puzzled by Elliott’s activism can look to past campaigns for insight

After
Elliott
Management

revealed
a
$1.9
billion
stake
in


Southwest
Airlines
in
June,
an
initial
rally
in
the
stock
quickly
fizzled.
Rather
than
sparking
typical
cheer
on
Wall
Street,

Elliott’s
campaign,
spelled
out
in
a
50-page
presentation,
led
to
confusion
and
concern
among
investors
and
customers.

The
hedge
fund
has
taken
activist
stakes
in
more
than
140
companies
over
the
past
three
decades,
according
to
data
from

13D
Monitor,
but,
like
most
activist
investors,
it
has
never
targeted
an
airline.

Southwest,
a
Dallas-based
company
that
started
flying
in
1971,
has
a

unique
culture
that’s
survived
profitably
for
decades
in
a
bruising
industry.

While
the
company
is
suffering
from
margin
deterioration
and
has

seen
its
stock
drop
in
each
of
the
past
four
years,
Elliott’s

demand
that
Southwest
fire
CEO
Bob
Jordan
and
oust
Chairman
Gary
Kelly
has
raised
questions
about
whether
the
activist
fully
understands
Southwest’s
insular
culture
and
the
industry’s

glacial
pace
of
change.

Elliott
hasn’t
publicly
specified
changes
it
wants
within
Southwest’s
offerings,
calling
instead
for
a
business
review.

“We
are
not
entirely
sure
what
Elliott
has
in
mind,”
analysts
at
Melius
Research
wrote
in
a
report
on
June
10,
the
day
the
firm
launched
its
campaign.
“Until
we
know
more,
we
are
sticking
with
our
Sell
rating.”

Southwest
has
taken
steps
to
defend
itself.
On
Wednesday,
the
airline
adopted
a
so-called

poison
pill
that
would
activate
if
any
shareholder
acquired
an
interest
of
more
than
12.5%,
limiting
Elliott’s
ability
to
attain
more
control.
Elliott
says
it
currently
has
an
interest
of
about
11%
of
the
company.

Despite
the
potential
wrinkle
introduced
by
Southwest’s
latest
move,
history
offers
some
clues
as
to
how
this
will
play
out.
Several
activism
experts
pointed
to
two
of
Elliott’s
past
targets
for
insight
into
the
hedge
fund’s
strategy
for
Southwest:


Suncor
Energy
in
2022
and


Marathon
Petroleum
in
2019.

Elliott
partner
John
Pike,
who
is
now
leading
the
Southwest
campaign,
was
involved
in
the
firm’s
actions
at
both
energy
companies.
While
Suncor
and
Marathon
resisted
Elliott’s
proposals,
including
leadership
change
and
business
reviews,
Elliott
still
got
much
of
what
it
wanted.

Elliott’s
activist
practice
has
helped
it
become
one
of
the
most
successful
hedge
funds
in
the
world,
surpassing
$65
billion
in
assets.
The
firm,
which
moved
its
headquarters
in
2020
from
New
York
to
West
Palm
Beach,
Florida,
has
only
had
two
losing
years
in
five
decades.
It
often
pushes
companies
to
make
dramatic
changes,
such
as
selling
off
businesses,
firing
executives
or
abandoning
strategic
plans.

In
recent
years,
however,
Elliott
has
also
shown
it
can
work
collaboratively
with
management.
Representatives
have
joined
the
boards
of
companies
including


Pinterest
and


Etsy.


Texas
Instruments
CEO
Haviv
Ilan
said
in
May
that
his
company
was

open
to
“constructive
dialogue”
with
Elliott,
and


Salesforce
CEO

Marc
Benioff
said
he
had

“thoroughly
enjoyed
getting
to
know”
the
Elliott
team
after
the
firm
dropped
plans
to
nominate
directors
at
the
software
company
in
2023.

Southwest
said
in
a
brief
response
to
Elliott’s
presentation
that
it’s
“thoughtfully
reviewing”
the
June
10
letter
from
the
hedge
fund
and
looks
forward
to
“further
conversations
with
Elliott.”
Southwest
also
said
it’s
confident
in
its
strategy
and
its
team
and
is
“focused
on
restoring
our
industry-leading
financial
performance.”
Jordan
said
he
has
no
plans
to
resign.

Pike
and
portfolio
manager
Bobby
Xu
are
leading
Elliott’s
Southwest
campaign.
Elliott
and
Southwest
representatives
met
in
person
in
Dallas
two
weeks
ago,
according
to
people
familiar
with
the
matter.
The
discussions
remain
in
the
early
stages,
said
the
people,
who
asked
not
to
be
named
because
the
conversations
were
private.

The
airline
has
tapped


Bank
of
America
and
law
firm
Vinson
&
Elkins
to
advise
it,
another
person
familiar
with
the
situation
said.

Southwest
shares
are
down
slightly
since
Elliott
announced
its
involvement,
despite
a
7%
jump
on
the
day
of
the
disclosure.
They
fell
5.7%
on
Friday
to
close
at
$26.94.

Southwest
did
not
provide
a
comment
for
this
story.

In
April
2022,
when
Elliott
revealed
a
stake
in
Suncor,
it
pointed
to
a
culture
that
had
become
overly
bureaucratic,
leading
to
an
operational
slump
and
a
string
of
worker
deaths
under
CEO
Mark
Little.

“We
have
considerable
respect
for
Suncor,”
Elliott’s
Pike
wrote,
in
calling
for
management
review.

Investors
were

initially
wary
of
Elliott’s
demands,
which
included
selling
off
Suncor’s
Petro-Canada
gas
stations.

Little
pushed
back
initially,
but
his
boardroom
support
evaporated
when
another
worker
was
killed
weeks
after
Elliott
announced
its
stake.

Little
resigned,
and
the
Canadian

company
soon
struck
a
deal
with
Elliott,
offering
three
board
seats
to
the
hedge
fund
and
conceding
to
a
strategic
review
—
meaning
a
potential
sale
—
of
its
Petro-Canada
gas
stations.

It
was
a
middle-of-the-road
resolution.
The
company
decided
after
the
review

not
to
sell
its
Petro-Canada
business.
But
it
also
brought
in
as
CEO
an
outsider,
in
longtime


Exxon
Mobil
executive

Rich
Kruger.

At
Southwest,
Elliott
sees
a
top
job
that
would
be
similarly
appealing
to
industry
executives
from
other
airlines,
according
to
a
person
familiar
with
the
firm’s
thinking.

While
its
Suncor
effort
ended
in
a
relatively
quick
victory,
Elliott’s
experience
with
Marathon
highlighted
the
firm’s
willingness
to
be
patient.

Elliott
first
amassed
a
stake
in
the
oil
producer
in
2016
and
asked
Marathon
to
“evaluate”
breaking
up
the
company.
Like
Suncor,
Marathon
ran
a
review
and
opted
to
stay
intact,
keeping
its
Speedway
gas
stations
as
part
of
the
business.

But
in
2018,
a
few
months
after
reaching
an
agreement
with
Elliott,
Marathon
announced
it
was
only
getting
bigger.
The
company
agreed
to
buy
rival
Andeavor
in
a
$23
billion
deal.

Elliott
responded
to
what
it
viewed
as
a
broken
promise
by
reviving
its
activist
campaign
in
2019,
picking
up
a
new
2.5%
position
and
proclaiming
that
it
would
make
sure
the
“right
leadership”
was
in
place. 

“While
the
Company
assured
shareholders
that
it
was
pursuing
a
full
review
of
the
Speedway
business,
it
had
a
different
agenda
entirely,”
Elliott’s
Pike
wrote

in
the
2019
letter.

Weeks
later,

Marathon’s
board
said
CEO
Gary
Heminger
would
retire
and
that
the
company
would
finally
spin
off
Speedway.
Elliott
reportedly
insisted
the
board
find
an
outsider
to
replace
Heminger.

In
March
2020,
Marathon
hired
38-year
industry
veteran
Mike
Hennigan
as
CEO.
Speedway
was

sold
to
7-Eleven’s
parent
company
for
$21
billion
in
2020,
months
after
Hennigan
took
the
post,
and
the
company
later
announced
a
$7.1
billion

buyback
program.

Years
after
its
victories
at
Marathon
and
Suncor,
Elliott
remains
a
top
five
shareholder
at
both
companies.

Elliott
is
now
one
of
the
top
investors
in
Southwest.
One
major
shareholder,


Artisan
Partners,
has
expressed
its
support
for
Elliott’s
campaign.
Southwest’s
bylaws
allow
big
shareholders
to
call
a
special
meeting
to
replace
its
board,
something
Elliott
could
consider
doing
further
down
the
road,
though
the
firm
hasn’t
said
if
it
plans
to
mount
a
proxy
fight.

Whether
or
not
shareholders
decide
to
back
Elliott’s
push,
history
shows
they
will
benefit.
Elliott-targeted
companies
tend
to
outperform
the
market,
according
to
a
13D
Monitor
analysis.
The
hedge
fund
holds
on
to
its
positions
for
two
years
on
average,
according
to
the
data.
Elliott
said
its
plan
can
help
Southwest’s
share
price
jump
77%
in
12
months
to
$49.

The
poison
pill
Southwest
introduced
this
week
could
complicate
matters.
It’s
normally
adopted
by
companies
fending
off
a
takeover
bid.
In
this
case,
it
limits
Elliott’s
ability
to
amass
more
control
and
also
suggests
that
Southwest’s
management
isn’t
interested
in
rolling
over.

In
the

press
release
announcing
the
plan,
Kelly
said
the
airline
“remains
open
to
any
ideas
for
lasting
value
creation”
but
said
adopting
the
poison
pill
was
part
of
the
board’s
“fiduciary
duties
to
all
shareholders.”
The
measure
would
allow
all
shareholders,
“other
than
the
person
or
group
triggering”
the
plan,
to
buy
stock
at
a
50%
discount
to
the
market
price
if
any
person
or
group
acquired
12.5%
or
more
of
the
company’s
outstanding
stock.

Elliott,
which
has
dealt
with
poison
pills
in
the
past,
hasn’t
made
clear
where
it
plans
to
go
with
its
campaign.
The
firm
isn’t
currently
pursuing
specific
changes
that
would
affect
things
such
as
Southwest’s
baggage
policy,
according
to
a
person
familiar
with
its
plans.
Southwest
is
the
only
domestic
carrier
that
allows
every
passenger
to
check
two
bags
for
free,
a
major
customer
perk,
particularly
for
those
who
fly
with
family
members.

But
a
refreshed
board
and
business
review
could
lead
to
scrutiny
of
some
of
Southwest’s
popular
offerings.

There
are
some
key
differentiating
factors
for
Southwest
when
compared
with
Suncor
and
Marathon.
For
one,
Southwest
hasn’t
made
a
notable
acquisition
since

2011
and
doesn’t
have
any
adjacent
businesses
to
spin
out.

Another
potential
hurdle
is
union
influence,
which
makes
it
harder
for
management
to
implement
significant
changes,
particularly
when
they
involve
layoffs
and
other
cost
cuts.
More
than
80%
of
Southwest’s
employees
belong
to
a
union,
and
there
are
separate
organizations
for
pilots,
flight
attendants
and
mechanics.
In
all,
workers
are
represented
by
at
least
11
unions,
according
to
the

airline’s
website.

Leadership
from
the
11,000-member

Southwest
Airlines
Pilots
Association
met
with
the
Elliott
team
in
Dallas
in
June.
The
group
conducted
an
“in-depth
analysis”
on
Elliott’s
“actionable
plans
and
timelines,”
labor
leaders
said
in
a
message
obtained
by
CNBC.

“In
very
simple
terms,
this
has
the
potential
to
be
one
of
the
most
significant
events
in
Southwest
Airlines’
history,”
SWAPA
leaders
wrote
of
the
activist
campaign.

Southwest
has
previously
acknowledged
some
of
the
problems
Elliott
highlighted,
including
system
failures
that
led
to
thousands
of
cancellations
and
left
millions
of
passengers
stranded
during
the
2022
winter
holidays.

But
financial
challenges
persist.
Last
week,
Southwest
cut
its

second-quarter
revenue
forecast.
The
company
cited
“complexities
in
adapting”
its
business
to
“current
booking
patterns
in
this
dynamic
environment.”

According
to
Elliott,
it’s
all
part
of
a
pattern
that
justifies
activist
intervention.

“Southwest
is
led
by
a
team
that
has
proven
unable
to
adapt
to
the
modern
airline
industry,”
Pike
and
Xu
said
in
a

statement.
“This
is
yet
another
example
that
fundamental
leadership
change
is
urgently
needed
at
Southwest.”

—
CNBC’s


Leslie
Josephs

contributed
to
this
report.