Will Gary Kelly's retirement at Southwest fully satisfy Elliott's demand for a management shake-up?
It's a safe bet to assume that (after a 9-Sep-2024 meeting with the activist investor Elliott Management) it wasn't exactly the way Gary Kelly planned to announce his retirement from Southwest Airlines, a company he has served for nearly four decades.
But Executive Chairman Mr Kelly and CEO Robert Jordan have been under pressure since Jun-2024, when Elliott made a nearly USD2 billion investment in the airline and proceeded to demand a shake-up in Southwest's upper management - including the removal of Mr Kelly and Mr Jordan from their roles and an overhaul of its business.
At this point it's not clear whether Elliott will be satisfied with only Mr Kelly's decision to retire in the spring of 2025.
Mr Jordan's fate could remain uncertain, given that six of the company's directors are retiring in Nov-2024, and Southwest plans to consider three candidates previously proposed by Elliott.
It's a major development for a company whose low cost model has been replicated by airlines worldwide, and it signals that Southwest's future is more uncertain than its storied past.
- Will Gary Kelly’s retirement as Executive Chairman satisfy Elliott’s demands for a management overhaul?
- Southwest’s board composition in the future is unknown; are some of Elliott’s proposed nominees equipped to handle current industry trends?
- Mr Kelly’s legacy at Southwest should not be overshadowed by recent events.
- What is less certain is Elliott’s long term commitment to Southwest.
After Gary Kelly's decision to retire, where does the fate of Southwest CEO Robert Jordan stand?
Elliott's criticism of Southwest was sharp after the investment firm disclosed its initial stake in the airline, with a particular aim at Mr Kelly and Mr Jordan - who, Elliott concluded, has presided over a period of severe underperformance.
See related CAPA - Centre for Aviation report: Can Southwest Airlines shake the 'Elliott' curse?
From a top-line level, Southwest reported a net profit of USD539 million in 2022, slipping to USD498 million for full year 2023.
In 2Q2024 its net income fell 46% year-over-year, to USD367 million.
Southwest Airlines: net profit(loss), from the year ending 2008 to 2023
During the course of the summer in the Northern Hemisphere Elliott became more aggressive, including nominating 10 directors to Southwest's board and crossing the threshold of holding a large enough stake in the airline to call for a special shareholders' meeting.
Mr Kelly, along with two of Southwest's independent directors, emerged from the 09-Sep-2024 meeting with the news of the long-time veteran's retirement date, the retirement of six board members, and unanimous support for Mr Jordan in his role as CEO.
"The added component of leadership change in the middle of Southwest's largest transformation to date is simply a risk that the Company and its Shareholders do not need[,] and cannot afford. This Board will hold Bob [Robert Jordan] and his leadership team strictly accountable to executing these plans and delivering Shareholder returns", said Mr Kelly in a letter to shareholders.
Elliott cited the unprecedented decision that nearly half of Southwest's board had opted to resign as "based on shareholder feedback".
The company also reiterated that the need for thoughtful and deliberate change at Southwest remained 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".
There was no mention of Mr Jordan and the board's faith in his leadership - which leads to questions about what could potentially occur after Mr Kelly's departure and several new members join Southwest's board. Elliott, in its statement, noted, "We hope to engage with the remaining directors to align on the further necessary changes".
In his letter Mr Kelly said the board anticipated appointing four new independent directors in the near future, giving due consideration to up to three of Elliott's candidates.
Are Elliott's board nominees for Southwest right for the times?
Three of those 10 nominees are the former CEO's of three airlines: Air Canada/ACE Aviation Holdings' Robert Milton, Gregg Saretsky of WestJet, and David Cush of Virgin America.
Those candidates are high profile figures in the aviation industry.
Mr Milton has an interesting legacy, drawing some praise; but also criticism for his decisions in the first decade of the 2000s to spin off Air Canada's loyalty programme Aeroplan and regional unit Jazz, after the airline emerged from the Canadian equivalent of Chapter 11 bankruptcy protection. When the former Air Canada CEO Calin Rovinescu took the helm from Montie Brewer in 2009, the company was on the brink of a second stint in creditor protection in a roughly six-year period.
Mr Saretsky was CEO of WestJet for eight years before an abrupt exit in 2018. He was instrumental in adding Boeing 787s to WestJet's fleet and the creation of its ultra-low cost subsidiary Swoop.
But more recently, Swoop has been folded back into the mainline operations and the 787 fleet has been capped at seven aircraft for the near future.
Mr Cush was CEO at Virgin America when it was acquired by Alaska Air Group. Virgin America was popular among customers for its product innovations. Indeed, as CAPA - Centre for Aviation reported in 2016, that Virgin America CEO David Cush had said before the airline made its debut, "...the flying experience was dismal[,] and it was pretty consistent[,] and [there was] very little product differentiation across the industry...it was basically a drab generic experience, really, regardless of what airline you could travel on".
See related CAPA - Centre for Aviation report: Virgin America leaves a lasting product legacy as it readies for absorption by Alaska
But airlines have rapidly evolved their product offerings since 2016, and many of Virgin America's innovations are either now standard, or have grown beyond what the airline offered when Alaska Air Group closed on its acquisition. Additionally, Virgin America faced challenges in building scale in the US market as a stand-alone airline.
There's no argument that those nominees could bring ample airline experience if they join Southwest's board; the question is - are they the right fit for this point in time as the industry evolves at a rapid pace?
The likelihood of all three former airline executives joining the board is presumably low, and the ultimate board composition will unfold over time.
Mr Kelly's legacy at Southwest should not be overshadowed by recent events
Few would argue with Mr Kelly's conclusions in his letter to shareholders regarding his tenure with the airline.
"From my seat since joining in 1986 as Controller, the company's value has grown 60-fold. It had an unprecedented, uninterrupted profit streak of 47 years - despite wars; recessions; oil price spikes; 9/11; the Great Recession, and all along, an airline environment so brutally competitive that every major airline in existence in 1986 other than Southwest is either gone[,] or has gone bankrupt," he stated.
Southwest Airlines: annual passenger traffic, 2002-2024YTD
The manner in which Mr Kelly has announced his retirement should not overshadow his accomplishments at Southwest, nor overshadow the airline's track record of profitability compared to other US airlines.
Yet he has also acknowledged that the past several years emerging from the COVID pandemic has been especially challenging. "Our performance has fallen short of our expectations. We've faced challenges many times and have overcome them. We are taking swift and bold action, and we will overcome these challenges, too", Mr Kelly has said.
Some of that bold action includes introducing assigned seating and an extended legroom offering. After the airline unveiled those changes Elliott said that they were occurring "more than a decade late, and after a 50% decline in its share price over the past three years".
Elliott's long term commitment to Southwest remains unclear as the airline embarks on a new chapter
Perhaps Elliott's actions accelerated Southwest's efforts to evolve, and much needs to be learnt about the airline's plans for the future. Its blueprint should become clearer at Southwest's investor day in late Sep-2024.
What is less clear is Elliott's commitment to Southwest over the longer term, which is in stark contrast to Mr Kelly's decades-long career at Southwest.
As he prepares to depart the airline, Southwest is embarking on a new, uncertain chapter.