Elliott Investment Management L.P. has issued a letter to the Board of Southwest Airlines Co. calling for a leadership change due to widespread dissatisfaction among shareholders with the Company’s performance. Elliott contends that new leadership is essential to restoring Southwest to its former leading position in the industry.

In the letter, Elliott criticizes recent actions by Southwest’s Board and management, which have only strengthened the case for a leadership overhaul. These actions include the adoption of a “poison pill” to prevent Elliott from increasing its stake above 12.5% and the appointment of a new director perceived as supportive of the current leadership. Elliott argues that these moves indicate a disconnect between the Board and shareholder sentiment, as well as the reality of the Company’s situation.

Elliott emphasizes that the Board must recognize that Southwest’s current leadership has lost shareholder trust. According to Elliott, shareholders do not believe the existing Board and management can create and execute a bold plan to turn around the Company’s fortunes.

To achieve a higher-performing future for Southwest, Elliott proposes:

1. Enhancing the Board of Directors
2. Upgrading Leadership
3. Undertaking a Comprehensive Business Review

Elliott expressed willingness to collaborate with the Board but warned that if there is no alignment, it intends to expedite measures to give shareholders a direct say in the necessary leadership changes.

The letter, available for download at StrongerSouthwest.com, underscores the need for accountability and improved governance at Southwest Airlines.

July 8, 2024

The Board of Directors
Southwest Airlines Co.
2702 Love Field Drive
Dallas, Texas 75235

Dear Members of the Board,

We are writing again on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together with their affiliates, “Elliott” or “we”) to summarize the feedback and key events since our letter and presentation last month on the urgent need for leadership change at Southwest Airlines (“Southwest” or the “Company”).

Since our publication on June 10, we have engaged with shareholders, equity research analysts, industry executives, and current and former employees. Many new institutions and individuals have reached out, providing new insights and information. The feedback has overwhelmingly supported our view that the Company’s performance is unacceptable and that leadership change is needed to restore Southwest to its former leading position.

Actions by Southwest’s Board and management team since our publication have only reinforced the need for leadership change:

• On June 26, Southwest announced significantly reduced unit revenue guidance for the second quarter, marking the eighth guidance reduction in the last 18 months and continuing its disappointing trend of industry-lagging revenue performance.
• On July 3, the Board adopted an outdated and shareholder-unfriendly “poison pill” to prevent Elliott from increasing its stake above 12.5%, prioritizing its own interests over those of the Company.
• Today, the Board announced the appointment of a new director, expanding the Board to 15 members. This new director appears to have been chosen for his support of the current leadership and status-quo approach, as he expressed in his announcement that he looks forward to supporting the Company’s strategic direction.

These actions, particularly the adoption of the “poison pill,” demonstrate how profoundly out of touch Southwest’s Board is with shareholder sentiment and the reality of the situation. Elliott is not seeking control of Southwest; we aim to strengthen oversight, upgrade management, and improve Company performance. Preventing shareholders who do not support the current leadership from purchasing additional stock reflects exceptionally poor governance and underscores the immediate need for accountability at Southwest.

Given these actions, we are increasingly concerned by the “self-help” half-measures the Board appears to be adopting. These measures will not restore the lost credibility of Southwest’s management. Elliott does not call for leadership change lightly. Given the long record of underperformance and the deep loss of confidence in Southwest’s leadership among shareholders and other stakeholders, it is untenable for the same Board and management team to continue to lead Southwest.

Shareholder Feedback Supports Leadership Change

Since releasing our materials on June 10, the feedback has highlighted a profound lack of confidence in Southwest’s leadership, strategy, and performance, reinforcing our conclusion that Board and leadership change is necessary to put Southwest on the right path.

We have spoken with numerous shareholders representing a significant percentage of Southwest’s shareholder base. While these conversations have been confidential, the sentiments expressed have overwhelmingly supported leadership change. This was illustrated by the public support from Southwest shareholder Artisan Partners on June 12, when it called on the Board to “reconstitute itself and upgrade the Company’s leadership to objectively assess the best path forward for Southwest’s shareholders, employees, and customers. This process needs to commence immediately.”

Other conversations echoed the feedback we received in the shareholder survey we conducted before publishing our views. Below, we include a representative sample of perspectives shared by some of Southwest’s largest investors as part of the survey, confirmed in our recent discussions.

“The CEO is a headwind to a turnaround. Firing him is the tailwind.” 

“I would rate them as the worst-performing management team in the airlines. This was a Company that has destroyed more value based on their own inaction than anyone else in the industry. They need to go.” 

“They need a new look across the board and you are only going to get that with [a CEO] who is not from Southwest… This is a classic example of where a disruptor stayed in the original model as the industry passed them by and now they have a problem.”

“I have zero confidence this team can get this right and certainly not in the timeframe that is needed. I rarely call for wholesale change at a company, but that is what is needed here.”

“Having the current CEO drive the process for a new strategy is not a good idea. I think that means we get glacial change and even if they say they are going to become SpaceX there is still going to be a fairly material overhang in the stock because of skepticism about the execution. This is a good time for the change.” 

“Would you ever see anyone issue a press release that says ’35 year veteran of the company to drive significant strategic, operational and financial turnaround,’ which is what you would have to believe is possible if you think that Bob Jordan is the right CEO. You need a really different leader to right the ship.”

“I don’t think this is the right CEO to lead the company and I would view his removal positively… Is this the leader you think is able to lead the company into the transformational change that is needed? I don’t think so and I am not sure other investors do either. I would be surprised if they did.” 

“So it is really [the CEO] has not done a good job running the company and what they have in front of them is considerably different than the job he came into, so this really is a natural time for a leadership succession. The Street would be widely supportive of a change.”

In summary, shareholders are demanding immediate change, and Elliott is committed to offering them a clear choice: continue with the current leadership team that has consistently underperformed, or opt for a fundamental leadership overhaul with new, proven airline industry executives capable of restoring Southwest to its rightful position as an industry leader.

Other Constituents Have Also Expressed Deep Concerns with Southwest’s Leadership

In addition to hearing from shareholders, we have received feedback on our views both publicly and privately from some of Southwest’s employees. For an illustrative example of the feedback we’ve heard, consider the sentiments expressed by SWAPA’s leadership on July 1:

“We see the numbers, not just every quarter when we have the board meeting here, but we know where the trajectory has been. Then actually when we meet with Bob Jordan and Andrew Watterson, we bring these concerns up… We have years of disdain from leadership, and that’s how labor has been treated… I mentioned the word disdain before and I’m going to say it again because that’s the only way that really we can describe how labor has been treated and SWAPA and our data-driven analysis has been treated. It’s been disregarded. And here we are with an activist investor basically saying everything we’ve said… Right now we just can’t [get behind the Company] because we’re again disdained and there’s very little concern right now at the C-suite, you know, outside of their jobs. There’s not a concern for the employees. And that’s something we can never forget and really won’t.” – SWAPA Leadership, The SWAPA Number Podcast (July 1)

In addition to this sort of public commentary, we have also received a deluge of unsolicited private expressions of support from individuals representing themselves as current and former employees of Southwest – many of whom were in strong agreement with our analysis of the Company’s recent performance and our calls for change:

“I’m a retired Southwest Captain and I couldn’t agree with you more on the next steps for Southwest… When I started at Southwest in 1997, it was ‘us against the world!’ Now it’s every man for himself as our famous culture is dying a slow, painful death. I believe it can be fixed, and I’m hoping you and your group can make it happen.” – Former Employee

“Not only do I have a vested interest in the success of the company (my SWA stock has lost over half of its value) but I have spent 50% of my life flying and working for a company that was once the envy of every other airline operating in the world. Without any doubt I agree that a new leadership team is needed.” – Current Employee

“As a SWA employee of more than 23 years, I am in complete agreement with your analysis. I have been screaming this for 15 years.” – Current Employee

“I am a former 21 year employee retiree and stock holder of SWA who completely agrees with your perspective of current senior management at SWA. [Bob Jordan] has driven the airline into the ground. Thank you for taking a bold stance and insisting on making some changes.” – Former Employee

Candid Feedback Highlights Need for Leadership Change at Southwest Airlines

Elliott Investment Management L.P. has received extensive feedback from shareholders expressing frustration with Southwest Airlines Co.’s (NYSE: LUV) Board and management. Stakeholders believe the leadership has ignored their input for years, leading to the Company’s declining performance.

The Path Forward

While Southwest Airlines is starting to consider incremental changes due to public pressure from Elliott, it is essential for the Board to recognize that the current leadership has lost shareholders’ trust. After years of complacency and an inability to adapt to the complexities of the current airline environment, shareholders are not confident in the Board and management’s ability to devise and execute a transformative plan for Southwest’s turnaround.

One of the biggest short-term risks for Southwest is the Board’s potential announcement of half-measures aimed at avoiding more fundamental changes, such as replacing the CEO without a comprehensive search process. Such hurried, unilateral measures lacking shareholder buy-in epitomize “short-term thinking” and are likely to lead to further deterioration in performance over time.

Investors want new leaders who bring fresh perspectives and proven expertise to preserve the best aspects of Southwest while charting a path to a higher-performing future.

Elliott urges the Board to collaborate on the following changes to strengthen oversight and select the most qualified new CEO to lead the Company into the future:

1. Board Changes: Elliott has identified several highly qualified former airline executives and industry leaders eager to join Southwest’s Board. These individuals are independent of Elliott and have a proven track record of creating value in their previous roles. Unlike the newly added Board member, their appointment would not be conditioned on supporting the status quo. They would evaluate the business and its leadership without any preconceived commitments. The Company should begin reconstituting the Board to include these leaders immediately. Shareholders will likely support these individuals’ expertise, which contrasts sharply with the existing Board’s lack of independence and relevant experience, contributing to years of poor performance and lack of management accountability. Additionally, Elliott believes the role of Executive Chairman should be retired, and an independent chair from outside the Company should be appointed.
2. Upgraded Leadership: The Company should announce a CEO transition and select an interim CEO who can gain investor trust, potentially one of the newly appointed Board members. Following the Board’s reconstitution, a CEO search committee composed of new and existing directors should lead the search for the best candidate to become Southwest’s next CEO. This new CEO should be sourced externally and possess relevant airline or transportation industry experience, strong operational capabilities, and a proven track record.
3. Comprehensive Business Review: With a refreshed Board and a highly qualified new CEO, Southwest would be well-positioned to develop and execute a new strategy to restore industry-leading performance. A new Board-level Business Review Committee should lead this comprehensive review. Fresh perspectives, operational excellence, and an openness to evaluating all options are critical to Southwest’s future success.

Elliott is dedicated to the long-term success of Southwest Airlines and stresses the need for accountability. The adoption of a “poison pill” and the unilateral appointment of a new director by the incumbent leaders demonstrate the Board’s attempt to entrench itself rather than earn shareholder support. Such measures reflect a disconnect with shareholder sentiment and are tantamount to an admission of failure.

Elliott remains open to collaborating with the Board on a path forward consistent with the outlined framework. However, absent alignment, Elliott intends to act swiftly to give shareholders a direct say in the necessary leadership changes. Elliott is committed to improving Southwest’s performance with a new strategy guided by accomplished industry executives and leaders, believing that fellow shareholders will support this new direction.

As one of Southwest’s largest investors, Elliott is committed to the sustainable, long-term success of the Company. However, the current Board has failed to hold itself and the management team accountable for the prolonged value destruction endured by Southwest’s shareholders. The “poison pill” announced on July 3 suggests that the Board feels it needs protection from the Company’s owners rather than earning their support, which is tantamount to an admission of failure.

Entrenchment maneuvers by the Board, such as this “poison pill” and the unilateral appointment of a new director handpicked by the incumbent leaders to maintain the status quo, will not be effective given the deep shareholder frustration that exists today. We are open to collaborating with the Board on a path forward consistent with the framework outlined above, but without alignment, we intend to act swiftly to give shareholders a direct say on the necessary leadership changes.

We are dedicated to realizing the substantial opportunity of improving Southwest’s performance with an updated strategy guided by accomplished, best-in-class industry executives and leaders. Based on the feedback we have received to date, we believe our fellow shareholders will be equally committed to supporting this new direction. We are available for further discussions at your earliest convenience.

Sincerely,

John Pike
Partner

Bobby Xu
Portfolio Manager

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