By Svea Herbst Bayliss
NEW YORK (Reuters) – Elliott Investment Management, which now owns about 9.7 percent of Southwest Airlines Co (NYSE: )’s voting power, told investors the company needs new outside leadership for a “better future” but is also prepared to move forward with a planned proxy battle.
In a letter to shareholders, the hedge fund seeks to increase pressure on the airline by proposing the formation of a new board-level committee that would conduct a comprehensive review of the business and “drive transformational change.”
The hedge fund said it is eager to meet with company representatives on Sept. 9 to discuss ways to address the “enormous” challenges facing the airline. But Elliott also warned that if leaders cannot determine “what is best for Southwest” and its shareholders, it will move forward with challenging the board.
An investor needs 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 was ready to meet with Elliott on Sept. 9, and that it had gathered feedback over the past few months and met with several shareholders directly.
“We welcome the opportunity to discuss ideas that will enhance sustainable shareholder value as we work toward a collaborative solution,” Southwest said in a statement.
Transformation plan
Elliott had been seeking to revamp the board and remove top executives to help improve the company’s performance. In June, CEO Bob Jordan said Southwest had a “great plan” that management would execute and that he had no plans to resign.
The airline is trying to implement a turnaround plan, including adding seats with more legroom, moving to dedicated seating, and appointing a new board member in July. Its stock price, which had been under pressure, has recently pared losses.
Southwest shares were trading largely flat at $28.12 midday Monday.
Earlier this month, Elliott laid out plans to nominate 10 candidates for directorship on Southwest’s 15-person board, including former Virgin America CEO David Koch and Robert Milton, the former CEO of Air Canada.
In the letter, Elliott explained why it wanted so many board seats. The hedge fund firm doesn’t want to be “in charge” but said the board is “designed to serve the interests” of CEO Robert Jordan and his successor and current CEO Gary Kelly. Elliott has been pushing to replace Jordan and Kelly since its stake in the airline went public in June.
As a public company, Elliott wrote, Southwest should be accountable to shareholders and not “an absolute monarchy.”
The letter said some investors share Elliott’s frustration, noting that Artisan Partners (NYSE: ) has publicly called for a change in leadership and urged the board to work with Elliott. Other shareholders have privately expressed their concerns to the hedge fund, the letter said.
The hedge fund also pointed to concerns among Southwest pilots who have called for bold leadership to fix the company’s problems.
The letter said the airline must find a comprehensive solution, “not just a selection of new managers under current management and a few long-overdue initiatives.”
While CEO Jordan recently wrote that the battle with Elliott is “a battle for the heart of our company,” the hedge fund said it is a battle for Jordan and Kelly “to continue to control Southwest, on their terms, for as long as they wish.”
Elliott said it is preparing to call a special shareholder meeting where investors will have the opportunity to vote on board members.
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