Elliott Management looks to overhaul Southwest Airlines board

The future of Dallas-based Southwest Airlines is on the line as its board battles with an activist hedge fund that invested nearly $2 billion in the airline's stock and is calling for an overhaul of company leadership.

Why it matters: Southwest is struggling to retain credibility after reporting $231 million in first-quarter losses and potentially dangerous incidents involving their planes this year.

• Plus, the airline has cut flights and ended service at four airports because of delivery delays of Boeing aircraft .

Catch up fast: Florida-based Elliott Management called for an overhaul of Southwest leadership, including a new CEO and board chairman, after taking an 11% economic interest in the company in June to become one of the airline's largest investors.

• Last week, Southwest adopted a shareholder rights plan — aka a poison pill — to try to keep Elliott from buying a larger stake in the company. The move would temporarily lower stock prices to discourage the activist investor from buying more shares in the company.
• On Monday, Southwest added a new board member , Rakesh Gangwal, the co-founder of Indian low-cost carrier IndiGo and a former US Airways CEO.
• The same day, Elliott partner John Pike and portfolio manager Bobby Xu sent a letter emphasizing the need for new leadership.

Between the lines: Elliott says Gangwal's appointment, which expands the board of directors to 15 members, is an attempt to ensure the leadership group maintains the company's status quo.

• "Preventing shareholders who do not support the company's failed leadership and oversight from purchasing additional stock reflects exceptionally poor governance and underscores the immediate need for accountability at Southwest," the Elliott executives wrote.

Threat level: Southwest relies on Boeing aircraft, with more than 200 Boeing 737 Max 8 planes in service.

• The aircraft manufacturer reached an agreement this week with the U.S. Department of Justice to plead guilty to a criminal fraud charge in its handling of two fatal 737 Max crashes.

What they're saying: The Southwest board's executive chairman, Gary Kelly, says he believes in the company's leadership, which has made a "good faith effort" to talk to Elliott Management.

• "We are confident that we have the right strategy, the right plan, and the right team in place to succeed," Kelly said in a statement .

The other side: Elliott has interviewed Southwest investors and employees to get a feel for how the company is managed and how it can be more efficient. The fund says investors view the leadership team as a failure and want to see a change.

• "Southwest's leadership has already lost the trust of its shareholders," this week's Elliott letter says.

What's next: Southwest Airlines will release its second-quarter financial report July 25.

• The company has already cut its revenue forecast for the period.