Elliott takes Southwest fight to shareholders, nominates eight directors

By Svea Herbst-Bayliss

(Reuters) -Elliott Investment Management is taking its fight with Southwest Airlines to investors by calling for a special shareholder meeting where they can vote on new director candidates who would ultimately steer company strategy.

In calling for the meeting, Elliott is taking a highly unusual step but one it has telegraphed for weeks after concluding that recent changes made by the carrier fall short of ensuring real improvement.

Southwest, which has a market capitalization of $18.45 billion, said it will review the hedge fund's request and "discuss the process for setting a special meeting with Elliott in a constructive manner."

Elliott, which oversees about $70 billion in assets and owns 10% of Southwest's common stock, has pushed for months to replace some members of the board, oust Chief Executive Bob Jordan, and review its strategy to improve financial performance and boost the share price.

The hedge fund said on Monday that it was officially calling for the special meeting to be held on Dec. 10 and submitted proposals to replace eight directors and take control of the board. The company's last annual meeting was held in May 2024.

"Absent a thorough reconstitution of its Board, the story of Southwest will remain one of empty promises and unfulfilled potential," Elliott partner John Pike and portfolio manager Bobby Xu said in a statement.

Southwest said Elliott's demands are "extreme" and appear designed to "result in full control of the board by Elliott's hand-picked nominees." The company also said it tried to reach a resolution to avoid a fight and noted that the timing of the proposed special meeting was designed to "maximize disruption" before one of the busiest travel periods of the year.

The size of the board is expected to shrink to 12 people next year and the company has signaled a willingness to appoint three directors with Elliott's input. But it also said on Monday that the hedge fund continues to "block its director candidates from being interviewed" by the company.

Southwest Airlines, which has been struggling to remain profitable since the COVID-19 pandemic, has taken steps to turn the business around, including adding seats with more leg room and dropping its marquee open seating system.

The airline unveiled several initiatives last month to shore up sagging profits, including partnerships, vacation packages for customers and aircraft sale-leasebacks.

It also added a new director earlier this year and said six directors would go in November, and that executive chairperson Gary Kelly would leave in May.

ELLIOTT'S THREE-PRONGED STRATEGY

Southwest's stock price has fallen 42% in the last five years but has climbed 8% in 2024. It was trading down 1.37% at $30.22 on Monday afternoon.

Bloomberg first reported the news on Monday before Elliott issued its statement.

Elliott met with the carrier in September but has previously called the company's course "haphazard" and run by a group of executives in "full self-preservation mode."

The hedge fund's proposed eight director candidates are executives with industry and regulatory experience, including Michael Cawley, who served as deputy CEO at Ryanair, and David Cush, who served as CEO of Virgin America.

Although the hedge fund did not explicitly target Jordan to be ousted by its candidates, people familiar with Elliott's thinking said the firm remains committed to installing new executives, including the CEO after having said for months that he must go.

Since its position at Southwest became public a few months ago, Elliott has held firm to a three-pronged strategy. First it wants to refresh the board with independent industry experts who could then pave the way to its second and third goals of holding management accountable and ultimately driving improved financial performance, the people said.

For Elliott this is the first time the hedge fund is launching a board challenge at a U.S. company since 2017 when it nominated directors to the Arconic Corp. board.

As one of the biggest and busiest activist investors, Elliott has previously pushed for changes at coffee chain Starbucks, Salesforce and Twitter.

(Reporting by Svea Herbst-Bayliss in New York with additional reporting by Utkarsh Shetti in Bengaluru; Editing by Shinjini Ganguli and Emelia Sithole-Matarise)