Elliott's buys $2bn stake in Southwest; airline's shares soar

American-based activist investor Elliott Investment Management has bought a $1.9bn stake in Southwest Airlines. Following reports, the low-cost carrier's shares rose approximately 7% in premarket trade on June 10, 2024. According to the Wall Street Journal, Elliott is one of Southwest's largest investors. Raymond James analyst Savanthi Syth, who has an 'outperform' rating on the airline, said: ""We are not surprised by activist interest in Southwest given the very strong franchise with valuable tangible and intangible assets, such as brand (including loyalty program and co-branded credit card), fleet (current and orderbook), network, and balance sheet (net cash position unique among US airlines)."" In a letter sent to Southwest's board of directors, the investor said it plans to enhance the airline's board of directors, upgrade its leadership, and undertake a ""comprehensive business review"" as part of its 'Stronger Southwest' plan. With these actions carried out, Elliott believes ""Southwest stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period."" The investor said in its letter: ""Elliott's view that Southwest's poor execution and leadership's stubborn unwillingness to evolve the company's strategy have led to deeply disappointing results for shareholders, employees and customers alike."" It added: ""Elliott is convinced that Southwest's issues are addressable with the right leadership and a comprehensive, unbiased evaluation of available opportunities, and looks forward to collaborating with the company to restore accountability and best-in-class financial performance for the benefit of Southwest shareholders, employees and customers."" Syth commented: ""While there is currently no indication of an upcoming change in management, there are some (both inside and outside of Southwest) that believe sufficient change cannot occur without a change in leadership."" Speaking to Airline Economics, a Southwest spokesperson said: ""We maintain an open dialogue with our shareholders and value their perspectives related to enhancing shareholder value. We were first contacted by Elliott yesterday [June 9] and look forward to better understanding their views on our company. ""The Southwest board of directors is confident in our CEO and management’s ability to execute against the company’s strategic plan to drive long-term value for all shareholders, safely and reliably serve our customers and deliver on our commitments to all of our stakeholders."" The letter had also lamented Southwest's ""decades-old approach"" that has held it back from competing in the modern airline industry. It added: ""This ethos pervades the entire business with outdated software, a dated monetisation strategy and antiquated operational processes."" Southwest Airlines had experienced an operational meltdown in December 2022 where over two million passengers were left stranded. The US Department of Transportation (DOT) had alerted passengers in May 2024 that they were able to claim compensation for the holiday meltdown. Syth added Southwest has the opportunity to address its ""shortcomings"" in terms of technology, as well as introduce offerings it lacks in comparison to the rest of the industry, such as red-eye flights; routes that depart at night and arrive at their destination in the morning. The airline had posted a disappointing first quarter results, widening its net losses to $231 million in first quarter 2024, slumping further from its net loss of $159 million in the same period a year prior. Following the results, the airline had reportedly cut pilot hours and pay as a result of continued aircraft delivery delays and poor results.