By Svea Herbst-Bayliss
NEW YORK (Reuters) – Elliott Investment Management, which now has voting power over about 9.7 percent of Southwest Airlines, is telling investors the company needs new outside leadership for a “better future” but is also ready to press ahead with a planned proxy fight.
In a letter to shareholders, the hedge fund is ramping up pressure on the airline by proposing a new board-level committee that would conduct a comprehensive review of the business and “drive transformational change.”
The hedge fund said it is looking forward to meeting with company representatives on Sept. 9 to discuss ways to address the “immense” challenges facing the airline. But Elliott also warned that if leaders cannot identify “what is best for Southwest” and its shareholders, it will move forward with a challenge to the board.
An investor would need to own 10% of Southwest shares to call a special shareholder meeting and Elliott is very close to that point now, having increased its stake from 8% previously.
The company said Monday it is prepared to meet with Elliott on Sept. 9 and that it has gathered feedback over the past few months and met directly with many shareholders.
“We welcome the opportunity to discuss ideas that can create sustained shareholder value as we work toward a collaborative solution,” Southwest said in a statement.
Restructuring plan
Elliott has been pushing to revamp the board and remove top executives to help improve the airline's performance. In June, CEO Bob Jordan said Southwest has a “big plan” that management will execute, and that he had no plans to resign.
The airline has been trying to implement a turnaround plan, including adding seats with more legroom, adopting assigned seating and appointing a new board member in July. Its stock price, which has been under pressure, has pared losses recently.
Southwest shares were trading virtually unchanged at $28.12 midday Monday.
Earlier this month, Elliott laid out plans to nominate 10 director candidates for Southwest’s 15-person board, including former Virgin America CEO David Cush and Robert Milton, the former CEO of Air Canada.
In the letter, Elliott explained why he wants so many seats on the board. The hedge fund does not want to be “in charge,” but said the board is “specifically constructed to serve the interests” of CEO Robert Jordan and his predecessor and current CEO Gary Kelly. Elliott has pushed for Jordan and Kelly to be replaced since his stake in the airline became public in June.
As a public company, Elliott wrote, Southwest is accountable to shareholders and is not “an absolute monarchy.”
Some investors share Elliott’s frustration, the letter said, noting that Artisan Partners (NYSE:) has publicly called for a leadership change and urged the board to work with Elliott. Other shareholders have privately expressed their concerns to the hedge fund, it wrote.
The hedge fund also pointed to concerns from Southwest pilots, who have called for bold leadership to fix the company's problems.
The airline must find a comprehensive solution, “not just some hand-picked new directors who are beholden to current management and a few long-awaited initiatives,” the letter says.
While CEO Jordan recently wrote that the fight with Elliott is “a battle for the heart of our company,” the hedge fund said it is a fight between Jordan and Kelly to “continue to control Southwest, on their terms, for as long as they wish.”
Elliott has said it is preparing to call a special shareholder meeting where investors will have the opportunity to vote on directors.
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