Southwest Airlines Faces a Decisive Fight Over Its Future

Southwest Airlines will host a blockbuster event in Dallas this week, to unveil a service most other carriers began offering decades ago. At its annual Investor Day, Southwest will showcase its first-ever plan for assigning passengers to specific airplane seats, including premium-priced larger ones that will require altering the layouts of the company's previously egalitarian cabins.

Selling a variety of seating options at different price points has long been the practice at Fort Worth–based American Airlines —and at Delta, and United, and most other major carriers around the world. Yet some insiders think Southwest will treat the announcement with the sort of fanfare that accompanied Apple's introduction of the first iPhone—framing it as a this-changes-everything moment for the company.

Even if Southwest CEO Bob Jordan doesn't don Steve Jobs's trademark black mock turtleneck, the event will mark a pivotal point in the airline's 53-year history. That's because among the shareholders watching carefully will be those at Elliott Investment Management , a so-called activist investment firm led by New York City billionaire Paul Singer. If Elliott doesn't agree that Thursday's announcements will deliver a quick enough boost to Southwest's stock price, it will likely turn up the volume of its calls for heads to roll at the airline—including Jordan's.

That Elliott is in a position to force anyone out of Southwest's C-suite confirms that things have already changed dramatically at the company. Particularly under its famed cofounder and CEO, the late Herb Kelleher , the airline has fiercely defended its independence, including its maverick business practices, such as open seating. But as the airline has struggled in recent years—not least with hugely disruptive delays and cancellations caused by decades of underinvestment in digital technology—Elliott has gained considerable influence over its future.

On June 10, Elliott announced it had acquired a big stake in Southwest, and it now says it holds 11 percent of the airline's 599 million outstanding shares—enough to call for a special meeting at which it could, with the backing of a majority of other shareholders, force out some or all of Southwest's board members and, by extension, Jordan. Elliott, which declined to make an executive available to Texas Monthly for an interview, has yet to call for such a meeting.

Southwest, whose executives also declined our interview requests, tried to fend off Elliott's attack earlier this month by offering to have six of its board members resign and to shrink its board from fifteen directors to twelve by next year. During a meeting at Elliott's offices in New York City, Gary Kelly , Southwest's executive board chairman and former longtime CEO, also said he'd retire by May.

Elliott trumpeted that appeasement offer as unprecedented . But two days after receiving it, the firm's representatives made clear to leaders of the union that represents the airline's mechanics that it wasn't enough. In a subsequent memo to union members, Bret Oestreich, president of the Aircraft Mechanics Fraternal Association, wrote that Elliott wants Kelly out before next spring. Elliot's "vision of a Southwest turnaround is one where Robert Jordan does not remain as CEO," Oestreich added. "If Elliott can assert enough Board influence, other top executives would also, most likely, be replaced."

Jordan has indicated he's not ready to step down, nor is he inclined to dismiss other executives. Back in August, he wrote to employees that the standoff with Elliott was "a battle for the heart of our company and our future—your future." The word "heart" was no doubt carefully chosen by a company that once dubbed itself "the love airline," is headquartered at Love Field, chose LUV for its stock ticker symbol, and paints a giant heart on the belly of each of its planes.

On Thursday, Jordan will have the chance to woo Southwest's other shareholders, the vast majority of which are institutional investors, such as the Vanguard Group and BlackRock. Such investors tend to demonstrate more patience than do "activist" funds such as Elliott, which typically press for actions that would quickly boost the stock price and are often skeptical of executives who wish to make longer-term investments in their businesses.

Indeed, one analyst, Sheila Kahyaoglu, a managing director at New York investment bank Jefferies, has said she expects that most Southwest shareholders are unlikely to vote Jordan out without first " entertaining a go-forward plan ." Jordan will have the chance this week to make his case. At Investor Day, he may tout the multiple ways in which he has expensively upgraded the technology Southwest uses to position its planes and flight crews where they're needed around the country. He could cite his securing of multiple new contracts with all of Southwest's unionized workers and, now, the addition of premium-seating fees and red-eye flights.

Could he add a Steve Jobs–style "one more thing"? Might Southwest end its "bags fly free" policy, since Elliott has called bag fees one of the "key commercial innovations" that Southwest has "written off"? Investors and analysts are eager to find out. Whatever's in the works, for an airline that has cultivated an irreverent, fun-loving brand reputation, the stakes are seriously high.

What would it mean to run Southwest Airlines to Elliott's liking? The firm offers a snapshot of its vision through a website it created called Stronger Southwest . Solutions include replacing a slew of executives and board directors with outsiders who would turn Southwest into an airline more like American, Delta, and United—with the same checked-bag fees and even more basic economy and premium seating options than Jordan may propose on Thursday.

In materials posted to the Stronger Southwest site, Elliott lists multiple executives it might seek to replace. They include Kelly, who has worked for Southwest for 38 years, and Jordan, whose tenure is 36 years, as well as chief financial officer Tammy Romo (33 years) and chief administrative officer Linda Rutherford (32 years). Each of them represents a direct link to airline cofounder Kelleher and former company president Colleen Barrett, who together built Southwest from a tiny Texas-only operation that started flying in 1971 into an airline that today carries more passengers domestically than any other in the U.S. and whose market value was, as recently as 2008 , greater than those of the six other major U.S. airlines combined.

In past conversations I've had with Jordan, Kelly, Romo, Rutherford, and Kelleher (who died in 2019), the long tenure of Southwest's leadership was considered a strength at the company—cited as key to Southwest's famously familial corporate culture . Cheryl Hughey, the airline's senior adviser for culture and engagement, who began working at Southwest in 1980 as a reservation agent, once told me, "It is very important to know your heritage and how the foundation [of the company] was formed. That's what families do."

Elliot's Stronger Southwest site doesn't mention family or corporate culture. But it does quote Kelleher: "If you don't change, you die. . . . If things change faster outside your company than they change inside your company, you've got something to worry about."

That quote, taken from a 2014 conversation between Gary Kelly and Kelleher that's discussed on Kelly's own LinkedIn page, must read like nails on a chalkboard to Southwest's traditionalist insiders. Elliott's Stronger Southwest site makes no mention of Kelleher's pronouncements that the airline primarily exists to serve its employees—not its shareholders. Kelleher's mantra was that if the company takes care of its people, the people will take care of the customers, whose loyal patronage will benefit the shareholders.

Elliott might argue, though, that Southwest isn't caring for its people as well as it once did. Materials on the Stronger Southwest site note a "massive decline in annual profit sharing pay for employees" in recent years. Southwest's annual profits were 57 percent lower in 2023 than in 2019, even as revenue was 16 percent higher. As a result, the average Southwest employee has seen annual profit sharing decline by more than $9,600 since 2019, according to Elliott.

Critics have labeled Elliott a "vulture fund" because of its history of buying distressed bonds of countries on the brink of going broke. Its founder, Singer, famously waged a fourteen-year-long global legal battle to collect on debts owed by the nation of Argentina. The battle nearly erupted in violence when Elliott obtained a court order to seize a three-hundred-foot Argentine naval ship while it was moored off the West African nation of Ghana. Crew members drew their weapons on a man who attempted to board the ship. Calmer heads prevailed, but in the end, Argentina ponied up $2.4 billion to Elliott. The New Yorker reported that that amount represented a 1,270 percent return on Elliott's initial investment.

Elliott isn't expecting quite so eye-popping a return on its Southwest investment. If the airline is managed as Elliott would prefer, according to Stronger Southwest, its share price should reach $49, although Elliott doesn't say how quickly that could happen. Such an increase would yield more than $1.2 billion for the firm.

If Southwest hopes to keep its adversarial investor from forcing it to become more like American and Delta and United—which, by the way, haven't exactly delighted investors over the past decade —it might look to its past for guidance. Kelleher once told me, during a conversation in his windowless office at Southwest's old Love Field headquarters, that he spent years parrying with Wall Street. "I would go to New York in the early eighties," he said, "and the investment community would tell me that they thought Southwest Airlines was going to have a very short future unless we changed to emulate what the airlines had traditionally done."

Kelleher resisted such calls, and as Southwest continued growing and posted rising profits, eventually Wall Street relented. But that only came after a few tense encounters, including one with an investment banker that I first read about in Thomas Petzinger Jr.'s 1996 book, Hard Landing . During an interview with Kelleher two decades ago, I asked him to confirm that confrontation, which had occurred in the same office where we were sitting.

Kelleher, who loved to put on a show, was more than happy to reenact what occurred. He set a Merit Ultra cigarette down in an ashtray and leaped from his blue leather chair, telling me that the banker said Southwest seemed like the perfect target for a hostile takeover. Kelleher wasn't about to let Southwest get gobbled up by some bigger competitor—be it crosstown rival American Airlines or someone else.

In recounting the story, he walked over, put his hands on my shoulders, and showed me how he'd slowly lifted the investment banker out of his seat. At over six feet, Kelleher, a former high school basketball star, could be physically imposing, and his baritone voice could sound downright scary when he got serious, which he had been with the banker. As he backed the man up against a wall and poked him in the chest, "the guy turned white as a sheet," Kelleher told me.

Kelleher explained to the banker that if any company tried to take over Southwest, he would do anything necessary to stop it. "I will even burn this company to the ground if I have to," he said. The shocked banker ran out the door, passing through the adjoining office of Colleen Barrett (who died earlier this year). Barrett rushed in to ask Kelleher what had happened. He replied: "I just delivered a message to Wall Street."

Up until the COVID-19 pandemic, Wall Street heeded that message. Southwest still boasts a strong claim to being what it calls "the most successful commercial carrier in the history of aviation." After its founding, the airline posted 47 consecutive years of profits, running from 1973 until COVID wrecked the travel industry, in 2020. Unlike American or Delta or United or most major U.S. carriers, Southwest has never declared bankruptcy.

Postpandemic, Southwest, like other airlines, has faced serious operational headwinds. Some of its problems have been worse than those of its peers, such as its holiday season meltdown in 2022. Southwest has remained profitable, but its stock is down about 1 percent since May 2023, while United's and Delta's are up about 17 percent and 39 percent, respectively. (American is down 21 percent.)

Elliott thinks Southwest can deliver shareholders a big short-term gain by becoming more like its rivals, the very thing Kelleher fought off all those decades ago. At Investor Day, we stand to find out whether the airline will comply or whether it's about to deliver another defiant message to Wall Street.

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