Southwest Airlines (LUV, Financial) has experienced declining margins and profits over several quarters, leading to a 24% year-over-year drop in its stock price. Now, the company faces additional challenges as activist investor Elliott Management initiates a proxy fight, planning to nominate ten independent candidates for LUV's Board of Directors.
- Nominees include:
- David Cush, former CEO of Virgin America
- Michael Cawley, former deputy CEO and CFO of Ryanair
- Sarah Feinberg, former senior official at the Department of Transportation
- Elliott, holding an 11% stake in LUV, aims to replace CEO Bob Jordan and former CEO Gary Kelly, now Executive Chairman.
- Jordan, Kelly, and LUV's executive team have devised a plan to improve the airline's fortunes, including ending its open seating policy in favor of assigned seating.
- LUV will also add red-eye flights to its schedule to boost profits.
- LUV's margins and profits have significantly lagged behind competitors. In Q2, its adjusted operating margin was 5.5%, compared to 14.7% for Delta Air Lines (DAL, Financial) and 13.1% for United Airlines (UAL, Financial).
- Rising industry capacity has pressured airfare prices and margins, but LUV has struggled to counter this with premium services or international business.
- In contrast, DAL and UAL have benefitted from affluent customers willing to pay for first-class seats and strong international travel demand.
It's unclear what specific strategies Elliott would implement if it wins the proxy fight and replaces ten of LUV's fifteen board members. Some of LUV's issues, like Boeing's (BA, Financial) ongoing 737 MAX production and delivery delays, are beyond its control. However, given the stock's poor performance, shareholders may be ready for significant changes. The coming months will likely be turbulent for LUV and its leadership team.
