Southwest’s Turnaround Strategy Boosts Shares as Activist Investor Elliott Remains Unconcerned, Reports Reuters

By Rajesh Kumar Singh

CHICAGO – Southwest Airlines introduced a range of initiatives on Thursday aimed at boosting its declining profits. These efforts include new partnerships, vacation packages for customers, and sale-leaseback transactions for aircraft. However, activist investor Elliott Management dismissed the airline’s plan.

Following the announcement, Southwest’s shares climbed by 5.4%, but year-to-date growth remains around 4%, significantly less than Delta Air’s 29% increase and United Airlines’ 43% rise. Elliott Management continues to push for the removal of CEO Bob Jordan and is determined to convene a special shareholder meeting for a leadership change.

Elliott criticized Southwest’s strategy as being "filled with long-dated promises of better performance" and insisted on "credible leadership." The hedge fund accused Jordan of mismanaging shareholders’ investments, stating, "Another promise of a better tomorrow from the same people who have created the problems we face today."

While Southwest has made some compromises for Elliott, it has ruled out any leadership changes. In the company’s first public investor meeting since 2022, held in Dallas, Jordan expressed that Southwest prefers to avoid a proxy battle with Elliott, but noted that the activist investor has shown little interest in collaboration.

Jordan referred to the new initiatives as "the most transformational plan we have ever had." These plans build upon earlier efforts to introduce assigned and extra-legroom seating to attract premium travelers, as well as the initiation of overnight flights, while maintaining the airline’s baggage policy.

Southwest forecasts that these initiatives will yield approximately $4 billion in additional earnings before interest and taxes (EBIT) by 2027. The airline anticipates achieving at least a 10% operating margin, a 15% return on invested capital, and over $1 billion in free cash flow within three years.

Savanthi Syth, an airline analyst at Raymond James, indicated that while the 2027 targets are encouraging, the airline needs to deliver on these promises.

Furthermore, Southwest raised its revenue forecast for the third quarter and announced a $2.5 billion share buyback program. The low-cost carrier has been challenged to find new high-margin revenue streams as operational costs have surged.

The operating margin fell to 0.2% in the first half of the year, down from more than 13% in 2019, as passenger volumes remain below pre-pandemic levels and shares have dropped about 40% over the past three years. The airline has downgraded its performance outlook at least eight times within the last 20 months, despite an increase in travel demand. Analysts predict a profit decline of around 83% in 2024 compared to the previous year.

Concerns over Southwest’s business model have arisen due to its consistent underperformance. In response, Jordan acknowledged the need for the airline to evolve and adapt, stating, "Our model is not broken, but it is in need of continued calibration and enhancement."

Before the COVID-19 pandemic, Southwest enjoyed a record 47 consecutive years of profitability. However, delays in aircraft deliveries and shifts in post-pandemic travel patterns have negatively impacted earnings.

To address operational risks, Southwest plans to slow its annual capacity growth to between 1% and 2% from 2025 to 2027 and minimize hiring. This approach has led to a reduced need for aircraft, creating opportunities to capitalize on the value of its Boeing 737 fleet. The airline is contemplating selling its planes to leasing companies.

Due to shortages of new aircraft, sale-and-leaseback arrangements have become lucrative for some airlines, and Southwest has nearly 700 new Boeing aircraft on order through 2031.

Additionally, Southwest announced plans to begin a partnership with Icelandair in early 2025 to enhance transatlantic connectivity and has plans to add at least one more partner carrier next year. It will also introduce vacation package sales for customers.

Southwest has appointed Robert Fornaro, the former CEO of AirTran and Spirit Airlines, to its board.