Southwest is replacing its board of directors and its chairman is due to step down next year, but it plans to keep Chief Executive Robert Jordan in his position in some concessions to hedge fund Elliott Investment Management, which had called on the airline to make reforms, including firing Jordan.
Southwest Airlines said Tuesday that six of its directors will step down in November and that it plans to appoint four new independent directors, potentially including candidates recommended by Elliott.
Southwest Airlines shares fell 4% in morning trading Tuesday.
Elliott, the fund led by billionaire investor Paul Singer, has taken a 10 percent stake in Southwest in recent weeks and is touting reforms it says will improve the airline’s performance and share price.
Elliott blames management for the decline in Southwest Airlines’ stock price, which has fallen by more than half since April 2021 after a rally over the past month. The hedge fund wants Jordan, who has been CEO since the start of 2022, to be replaced by the airline’s former CEO and Chairman, Gary Kelly.
Southwest said Tuesday that Mr. Kelly has agreed to retire after the company’s annual meeting next year. Mr. Kelly was one of three Southwest directors who met with Elliott representatives in New York on Monday. Six other directors, including the chairs of three board committees and former U.S. Sen. Roy Blunt, R-Missouri, are planning to retire in November.
Rising costs are making it harder for Southwest to recover from the pandemic, Kelly wrote in a letter to shareholders on Tuesday.
“It’s time for change,” Kelly wrote. “Not just to stir things up a bit, but to shake things up.” He said changes to Southwest’s routes, marketing and seating will transform the airline.
But he ruled out replacing the CEO, calling Jordan a “practical, detailed and insightful thinker” who understands Southwest’s “unique brand” and has the unanimous support of the board.
Elliott praised the move but suggested the pressure on Southwest isn’t over yet.
“We are pleased that the board has begun to recognize the extent of change required at Southwest Airlines and look forward to engaging with the remaining directors to reach an agreement on further necessary changes,” the hedge fund said. Elliott said the candidates it had nominated were “well-positioned to provide stability to the board and chart a new direction for the airline.”
Elliott argues that Southwest executives’ failure to adapt to changing customer preferences and modernize the company’s technology led to widespread flight cancellations in December 2022. The disruptions cost the airline more than $1 billion.
Southwest has been improving its operations, with cancellation rates through the start of 2023 slightly below the industry average and better than main rivals United Airlines, American Airlines and Delta Air Lines, according to FlightAware. But Southwest’s planes have been involved in a series of messy accidents this year, including a flight that came within 400 feet of crashing into the Pacific Ocean, and the Federal Aviation Administration has stepped up scrutiny of the airline.
Southwest Airlines has been profitable for 50 years and had never suffered a full-year loss until 2020, when the pandemic devastated air travel.
Since then, Southwest has been more profitable than American Airlines, but far less so than Delta and United Airlines. In the trailing 12 months through June, Southwest’s operating margin was slightly negative, compared with Delta’s 10.3%, United’s 8.8% and American’s 5.3%, according to FactSet.
For most of its history, Southwest was a swashbuckling upstart that operated from less-crowded secondary airports where it could turn around arriving planes and quickly pick up new passengers. It appealed to budget-conscious travelers with low fares and free rebookings and the ability to check up to two bags.
Southwest now serves many of the same major airports as its rivals and, with the rise of “ultra-low-cost” airlines, has often slashed its prices and added fees for early boarding.
Before Elliott announced its acquisition of Southwest Airlines in April, Jordan had hinted at further changes to the airline’s long-standing boarding and seating rules.
In July, he announced that Southwest would end its open seating system, where passengers could choose from available seats after boarding, and would begin assigning seats to passengers, in line with other U.S. airlines. Southwest also plans to sell premium seats with extra legroom and begin offering late-night flights.
Southwest Airlines still carries checked bags for free, but conducted a survey to gauge passenger resistance to checking baggage fees.