In response to activist investment firm Elliott Management’s aggressive tactics, the Southwest Airlines board of directors has taken decisive action by adopting a one-year rights plan, commonly referred to as a poison pill. This move is designed to thwart Elliott’s efforts to increase its ownership stake in the company, which currently stands at 11% as of June 10.
Under the terms of the rights plan, if any single shareholder or entity accumulates 12.5% or more of Southwest’s outstanding common stock, all other shareholders will be granted the right to purchase additional shares at a 50% discount. This mechanism is intended to dilute the influence of any shareholder seeking to gain a controlling interest in the company. Alternatively, Southwest could issue new shares to all existing investors except the triggering entity.
Elliott Management, known for its activist approach towards companies, has expressed its dissatisfaction with Southwest’s current leadership. The hedge fund is calling for the removal of CEO Bob Jordan and chairman Gary Kelly. Elliott has also laid out a strategic plan that it believes can drive Southwest’s stock price to $49 within the next year.
Southwest has defended its current management team, with CEO Bob Jordan reaffirming his commitment to the company. The airline has highlighted its recent efforts to address operational challenges, including enhancing IT capabilities, revising capacity plans, and exploring potential changes to its unique seating and cabin configurations.
Southwest’s profitability has declined in recent years, with the carrier projected to have the lowest profit margin among the four largest U.S. airlines in the current year. The airline’s stock price remains significantly below pre-pandemic levels, reflecting investor concerns about its future performance.
In order to regain industry-leading profitability, Southwest must focus on modernizing its business and operational models. This includes implementing strategic changes to enhance revenue generation, potentially through ancillary services or revised seating arrangements.
The conflict between Southwest Airlines and Elliott Management underscores the tension between activist investors seeking immediate changes and companies defending their existing leadership and strategies. As Southwest navigates these challenges, the airline faces a critical juncture in determining its future path forward.