Southwest Airlines is experiencing one of the biggest shakeups in its 53-year history [The Dallas Morning News]
TRIBUNE CONTENT AGENCY 11:59 PM ET 9/12/2024
Symbol Last Price Change |
| LUV | 29.1 | +0.23 (+0.7967%) | | AAL | 11.025 | +0.145 (+1.3327%) | | QUOTES AS OF 10:48:28 AM ET 09/13/2024 |
Southwest Airlines (LUV) is entering a new era, whether its shareholders, customers and leaders like it or not.
The Dallas-based air carrier won’t have its longtime open seating policy. It’s adding new premium options in the cabin and creating overnight flights.
Soon enough, the company’s longest-serving CEO and current executive chairman Gary Kelly won’t be leading its board of directors.
On Tuesday, Southwest(LUV) announced Kelly would not run for reelection for his role with the board after the 2025 annual shareholders meeting. Kelly, alongside Southwest(LUV) CEO Bob Jordan, was pressured by activist investor Elliott Investment Management to exit the airline. Jordan will remain at the company and Kelly said he supports Jordan’s leadership.
“It’s time to shake things up, not just stir them a bit,” Kelly wrote in a letter to shareholders announcing his departure. “The wisdom comes in knowing what to change and what not to change. We know that changes are required to some of our historic business practices. We know we will need to continually bring in new talent — in leadership and on the board.”
What’s changing at Southwest(LUV)?
Southwest (LUV) is in a different atmosphere today than five decades ago, when it grew roots in Dallas.
According to the company, 80% of Southwest(LUV) passengers and 86% of potential customers prefer an assigned seat. In August, Southwest(LUV) took those statistics and changed its open-seating policy, the first step away from a tradition the airline had started with.
“Our team does view this as a strategic transformation of the company,” Jordan said July 25 during the company’s second-quarter earnings call.
New seat configurations require Federal Aviation Administration approval, Jordan said. That can take several months. Southwest(LUV) has a fleet of roughly 800 aircraft that will see updates, including new seat designs and cabin interiors announced earlier this year. Jordan said the carrier needs to finish designing the seat layout. Then comes the long certification process.
The airline will also add premium, extended legroom rows to the cabin. Southwest(LUV) expects roughly one-third of seats across the fleet to have extended legroom, the same amount as competitors that fly similar narrowbody aircraft.
Southwest (LUV) also announced the addition of red-eye flights. The flights will begin on Valentine’s Day with five initial nonstop routes: Las Vegas to Baltimore and Orlando; Los Angeles to Baltimore and Nashville; and Phoenix to Baltimore.
“Continuing to evolve is core to our success, and we’re moving with urgency to restore our industry-leading financial position while staying true to who we are,” Jordan said in a video message Sept. 10. “As you know, we have plans to introduce assigned seating and premium seating options and offer red-eye flights. We will have more details to come at our investor day later this month.”
Southwest (LUV) has struggled financially since the pandemic. The changes are expected to create a profitable airline, one that Elliott has been pushing for in order to make money for shareholders.
However, Kelly, the company’s longest-serving leader, who has seen the airline go through many challenges, is leaving.
Kelly, 69, notified the board and company Sept. 9 of his plan to not stand for reelection at Southwest’s 2025 annual shareholders meeting and retire immediately afterward. His retirement comes alongside the departures of nearly half of Southwest’s 15-person board, including David Biegler, Veronica Biggins, Roy Blunt, William Cunningham, Thomas Gilligan and Jill Soltau, who each submitted resignations on Sept. 9, effective after the company’s scheduled board meeting Nov. 21.
Sept. 9 was also the day Southwest(LUV) and Elliott met at Elliott’s offices in New York to discuss changes the investment firm has called for, which focus on three main asks: enhance the board of directors, upgrade leadership and conduct a business review. Kelly, who attended the meeting with two independent directors, left unnamed in his letter to shareholders, said in the letter he believes discussions were productive.
Jordan thanked Kelly in a letter on Sept. 10 for his time at Southwest(LUV). During Kelly’s tenure, the company extended its streak to 47 years of profitability until the pandemic upended every hospitality business.
With the departure of seven directors, Southwest(LUV) will be left with 12 directors after the 2025 annual meeting and Kelly’s retirement.
Questions still remain
Southwest (LUV) customers have a lot of unanswered questions as to how these changes will impact them.
Some worry removal of the open-seating policy won’t be the only change and that more could follow, such as to bag policies and unique perks that Southwest(LUV) has developed over its history.
Meryl Evans, 54, a traveler who lives in Plano, said she always checks Southwest(LUV) first when she flies. Evans was born deaf and finds traveling with the airline the easiest experience for her. However, she’s concerned about not being able to choose her seat.
“It’s not about getting to sit near the front,” Evans said in an email. “It’s about being close to the staff for anything that comes up. I’m also concerned they’re taking the LUV out of Southwest(LUV). The actions and strategy feels cold, corporate. I know it’s part of doing business and making a profit, but LUV is the soul of what makes Southwest(LUV), well, Southwest.”
Customers are also seeking clarity on assigned seating. Southwest(LUV) has said more information will come at the airline’s investor day Sept. 26.
With the departures of Kelly and the six other board members, there’s much uncertainty as to who will come next. Elliott has named 10 candidates it believes have the experience to lead Southwest(LUV) to profitability.
The airline said it will fill four vacant spots and consider up to three of the 10 candidates Elliott proposed in August.
Southwest’s board of directors can hold its executives accountable, a key part of keeping the airline functional.
Rob Britton is an adjunct faculty member at Georgetown University’s McDonough School of Business and also spent 25 years at Fort Worth-based American Airlines(AAL).
“I’m not sure that new board members will make much of a difference, but Southwest(LUV) absolutely needs to commit to doing some things differently and some things better,” Britton said.
The hot seat
That raises a question: What will happen with Jordan?
“The board and corporate governance changes announced today will enhance our focus on returning to the high level of financial performance that we — and our shareholders — expect,” Jordan said in a video message.
There’s no time like the present, many analysts have said regarding Southwest’s need to change.
Brett Snyder, who writes aviation industry blog Cranky Flier, said investors may like the changes Elliott is proposing. But if the changes don’t pay off, that puts all eyes on Jordan.
“Ultimately it’s, ‘Let’s see where this goes,’ and if it doesn’t improve revenue performance soon, then, yeah, he could absolutely be in the hot seat,” Snyder said.
Andrew Watterson is another executive at Southwest(LUV) who would be held accountable if things don’t change, he said.
Watterson is Southwest’s chief operational officer and defended the airline when operations crumbled over the holidays in 2022. He stood before a U.S. Senate committee and fielded questions from lawmakers about what went wrong and how Southwest(LUV) would make changes.
“The two of them are the ones that have to be thinking, ‘We have to do this fast. We have to do it well. We have to show results quickly so that people think we’re the right people to be doing this,’” he said.
Immediately after the Sept. 10 departure announcements, Elliott put out a short statement calling the exits “unprecedented.”
“The need for thoughtful, deliberate change at Southwest(LUV) remains urgent, and we believe the highly qualified nominees we have put forward are the right people to steady the board and chart a new course for the airline,” Elliott wrote.
Keith Gottfried, managing member of Gottfried Shareholder Advisory, called the response “interesting.”
“What’s interesting about Elliott’s response yesterday was that it was short and it did not mention Bob Jordan,” he said.
What does the future entail?
After the moves on the board, there’s still more to come from the airline. Board vacancies are coming soon and an investor day is scheduled for the end of the month at Southwest’s Dallas headquarters.
Southwest (LUV) can appoint new directors, but there are other ways board vacancies could be filled. Gottfried pointed to two options: a settlement agreement could be negotiated or a proxy contest could start.
With a settlement, or cooperation agreement, he explained, Southwest(LUV) could say to Elliott that it likes up to three of the candidates Elliott proposed and wants to interview and hire them. Southwest(LUV) has already said it will consider some of Elliott’s candidates.
In a proxy contest, Elliott, with 10% commons shares in Southwest(LUV), could call a special shareholders meeting and potentially remove the entire board. This would require support from more shareholders. However, Gottfried explained that a special shareholders meeting isn’t likely until 2025 due to the planning involved.
More is still to come regarding Southwest(LUV), whether it be changes to leadership or operations. Company leaders think the airline is headed in the right direction.
“Southwest has a great plan,” Jordan said |
