Southwest and JetBlue undertake turnarounds – activist investors use different strategies
US airlines Southwest Airlines and JetBlue Airways face a pivotal year in 2027, which is the deadline for each company to deliver on stated EBIT (earnings before interest and taxes) goals inherent in their respective turnaround plans, which were presented to investors this year.
Those plans are fairly straightforward: fleet and network adjustments, product improvements and cost containment. But obviously execution is key for each airline as they face new activist investors that, for now, have adopted vastly different approaches in their roles.
There is also a possibility that Elliott could succeed in its efforts to remove some of Southwest's top executives from their posts, creating some level of uncertainty over the airline's transformation plan coming to fruition.
- Southwest’s EBIT improvement plans doesn’t impress the activist investor Elliott.
- Will Southwest have a chance to execute on that plan if Elliott continues to push for executive changes?
- JetBlue’s new activist investor, Carl Icahn, is more subdued as the airline works to forge its own independent path.
- What will 2025 have in store for those airlines and their activists investors?
Activist investor Elliott is not impressed with Southwest's transformation plan
Dallas-based Southwest Airlines recently unveiled a multi-faceted plan to produce USD4 billion in cumulative EBIT by 2027.
According to data from the Wall Street Journal, the company produced EBIT of USD224 million in 2023 and USD3 billion in 2019.
Initiatives the company plans to undertake include eliminating its signature open-seating in favour of assigned seats, an extended legroom offering, and restructuring its fleet and network realignment.
CAPA - Centre for Aviation's sister publication Aviation Week attended Southwest's investor day, where the company's Chief Operating Officer Andrew Watterson offered a comparison of Southwest's planned Apr-2025 schedule to Apr-2023.
"What you'll see is about 10% of routes were cut, about 10% of routes are new, and about 45% of routes have had capacity adjusted to an extent greater than 25%. So overall, 65% - almost two thirds of our routes - have had consequential action during this period, and that will continue."
A planned moderation of Southwest's growth is resulting in the airline pursuing direct sales of Boeing 737-800s and sale-and-leaseback transactions.
The airline has 65 requests for proposals out for a combination of sale-and-leaseback transactions and aircraft sales. The CAPA - Centre for Aviation Fleet Database shows Southwest owns 91% of its aircraft in service, as of early Oct-2024.
Southwest Airlines: owned vs leased aircraft in service, as of early Oct-2024
The airline intends to retire all 571 of its Boeing 737-700s/800s by 2031 and operate a fleet of 737-7s/-8s.
Southwest also plans to improve aircraft turn times, and add more red-eye flights to its operations, as part of its efforts to bolster EBIT.
But the planned undertakings did not sway Elliott, an activist investor that holds an 11% economic interest in Southwest and has been acutely critical of the airline's performance under Board Chairman and former CEO Gary Kelly and Mr Jordan.
Elliott described the plan as "...another promise of a better tomorrow from the same people who have created the problems we face today".
There is nothing revolutionary in the plan, but it has upside if Southwest meets its stated targets.
However, there's an added layer of complexity that JetBlue doesn't face in its strategy to improve its fortunes - an activist investor that has consistently demanded the departure of top management.
Succumbing to some of Elliott's demands, Mr Kelly and six directors plan to step down from Nov-2024 to May-2025. But Elliott has stated that it plans to call a special meeting of shareholders to vote on 10 board director candidates it has proposed.
See related CAPA - Centre for Aviation report: Will Gary Kelly's retirement at Southwest fully satisfy Elliott's demand for a management shake-up?
Elliott calls a special shareholder meeting for Dec-2024; what does that mean for CEO Mr Jordan's fate?
Elliott has now delivered a request to call a special meeting of shareholders in Dec-2024.
"Today, after exhaustive attempts to persuade Southwest to implement the necessary governance changes, we are formally calling a Special Meeting to give shareholders the opportunity to elect a completely independent, best-in-class slate of director nominees. Absent a thorough reconstitution of its Board, the story of Southwest will remain one of empty promises and unfulfilled potential," the company explained.
The company has also slimmed its proposed roster to Southwest's Board of Directors from 10 to 8.
It's not clear whether Elliott will ultimately be successful in a management shake-up - but it's an aggressive investor that rarely takes NO for an answer.
But Southwest is making moves to ensure that management has the opportunity to pursue the initiatives it believes will improve its financial stature.
The airline has announced a USD2.5 billion share buy-back programme. A new director that joined Southwest's Board in Jul-2024, co-founder of the Indian LCC Indigo Rakesh Gangwal, purchased 3.6 million of the company's shares for USD100 million. With the opening of the company's trading window for insiders, "I have made an investment in the company's stock", he explained.
Icahn continues to take much more of a behind the scenes role at JetBlue
The investment in JetBlue by the legendary activist investor Carl Icahn has been far less acrimonious than Elliott's decision to demand a management overhaul at Southwest.
Icahn took a 9.9% stake in JetBlue in Feb-2024, and two members of Icahn's business ventures subsequently joined the airline's Board of Directors.
JetBlue CEO Joanna Geraghty recently characterised discussions with Icahn as constructive, and it appears he is allowing the airline to focus on its own improvement plan, which aims to deliver an incremental "EBIT uplift" of USD800-900 million from 2025-2027.
Wall Street Journal data show that the airline had an EBIT of negative USD40 million in 2023, and USD819 million in 2019.
From a network perspective, JetBlue is redeploying 20% of its flying to US East Coast leisure destinations (that entails exiting 15 cities) by YE2024, and culling 50 routes through Jan-2025.
New York-based JetBlue is also making changes to its aircraft delivery stream, and perhaps the biggest product development is its plans to open lounges at New York JFK and Boston Logan International airport in late 2025. It's a move designed to attract and retain customers that increasingly want a more upscale experience.
"Lounges are probably the single most significant thing customers have asked for that we have not offered," Ms Geraghty said.
The airline is also deferring aircraft deliveries that will reduce its aircraft commitments over the next five years from USD5.3 billion to USD2.3 billion, and it plans to extend the lives of 30 Airbus A320ceo aircraft.
The CAPA - Centre for Aviation Fleet Database shows JetBlue has 111 aircraft on order.
JetBlue Airways: fleet summary, as of early Oct-2024
Ms Geraghty was JetBlue's President from 2018 prior to her assuming the CEO role in early 2024, and on the same day Ichan announced his stake in the airline.
As CEO, Ms Geraghty has forged her own path, and has stressed that JetBlue is also forging its own path in the aftermath of the US Justice Department being successful in forcing the airline to dissolve its alliance with American Airlines and abandon its plans to acquire Spirit Airlines (which is now in tough negotiations with creditors).
For now, Mr Icahn and his colleagues appear to be willing to allow JetBlue to work and execute its turnaround plan without public commentary.
Southwest and JetBlue navigate different investor dynamics - what does that mean for 2025?
Southwest and JetBlue are in somewhat similar yet diverse positions as 2024 draws to a close.
Both airlines are shoring up their financial positions as new activist investors loom large.
At this point, it seems that those activist investors have drawn lines in the sand with their approaches, which could prove for an interesting 2025.