Southwest Airlines Bends To Activist Investor, Restructures Board

After a months-long battle, Southwest Airlines has settled with the activist hedge fund investor Elliott Investment Management and has agreed to restructure board leadership. The carrier’s concessions will avert a proxy fight in exchange for naming six new directors, short of giving Elliott control of the board.

As part of the settlement, Southwest’s former CEO and executive chairman Gary Kelly and six directors will fast-track their retirements and leave November 1. Kelly had been slated to leave in 2025.

The airline will replace the outgoing directors with five Elliott-blessed candidates: David Cush, the former CEO of Virgin America; Sarah Feinberg, a former senior official at the Department of Transportation and former head of the Federal Railroad Administration; Dave Grissen, the former Group President of Marriott International; Gregg Saretsky, the former CEO of WestJet; and Patricia Watson, a longtime technology executive and the current EVP and Chief Information & Technology Officer at NCR Atleos. Pierre Breber, former chief financial officer of Chevron, also has been appointed to the board.

Notably, Southwest Airlines CEO Bob Jordan will keep his job. Elliott had previously pushed hard to replace both Kelly and Jordan.

The campaign began in June, when Elliott Investment Management, a firm owned by Paul Singer, “Wall Street’s most feared activist investor,” took a $1.9 billion stake in the carrier. That represents a roughly 11% interest in the company—far from a majority, but enough to give Singer’s firm a big voice as one of the airline’s largest single shareholders.

Elliott immediately made clear its intention to shake up the business, framing Southwest as “the most compelling airline turnaround opportunity in the last two decades” in a letter sent to the Southwest board. The investor also submitted an a 51-page presentation to the board called “Stronger Southwest,” in which it sketched out a plan for increasing profits.

In July, Southwest conceded to many of Elliott’s key asks. The Dallas-based carrier announced sweeping changes to its business model, including ditching its half-century open seating model in favor of assigned seats; offering premium, extended legroom seats; and introducing overnight “red-eye” flights.

But Elliott remained unmoved. “This failed leadership team’s announced initiatives—obvious attempts at self-preservation—are simply not credible. Too little, too late is not a strategy. It’s time for new leadership,” Elliott said in a statement at the time.

Still, the airline’s responsiveness demonstrated that an eventual settlement was likely. “Based on all the changes that Southwest has made to date—very significant and clearly transformational changes—it would have been odd if there was not a path for the parties to resolve this in the advance of a special meeting,” said Keith Gottfried, CEO of Gottfried Shareholder Advisory, a shareholder activism defense firm.

After months of trading barbs, now both sides are making nice. “We are pleased to have reached a collaborative resolution with Elliott, continuing our board refreshment with the addition of new directors who bring complementary skills and experience,” Kelly said in a release. “I am confident this board will continue to hold the leadership team accountable for executing its transformational plan and delivering financial performance.”

Elliott withdrew its request to call a special meeting of shareholders and says it no longer intends to nominate additional candidates to the board.

“We are pleased to have come to an agreement with Southwest on the addition of six new directors that will enhance and revitalize its board,” said Elliott partner John Pike and portfolio manager Bobby Xu in a statement, adding that the changes “will position the company to enhance business performance, drive operational execution and evaluate additional changes to create long-term shareholder value.”

It would have been unusual for the two parties not to have reached a settlement, says Gottfried. “Most activist situations do not go to a shareholder vote. That’s statistically the case and has been the case for a long time,” he said. “But I think Elliott was fully prepared to go to a meeting. I have no doubt that they were prepared to go all the way if they needed to.”

For many, it had always seemed inevitable that one of the country’s most powerful activist investors would get its way.

“You don’t ignore Elliott, period, end of discussion,” Lisa Silverman, senior managing director at K2 Integrity, a risk-management consultancy firm, told Forbes in July. “Because bad things happen when you ignore Elliott.”