The Southwest Airlines board of directors has taken action to defend itself against activist investment firm Elliott Management.
On Wednesday, the airline announced that its board had adopted a one-year rights plan, known in investment parlance as a poison pill, geared toward diluting the potential for Elliott to accumulate a larger ownership share in the company.
The move is a response to Elliott's accrual of $1.9 billion of Southwest shares, amounting to 11% of the company, as of June 10. Elliott, a hedge fund with a history of forcing management changes at companies it targets, is calling for the ouster of Southwest CEO Bob Jordan and chairman Gary Kelly.
Under the rights plan, if a single shareholder or shareholding entity accrues 12.5% or more of outstanding Southwest common stock, all other shareholders will be entitled to purchase up to as many shares of stock as they already own at a 50% discount. Alternatively, the company could simply issue an additional share of stock for each share held by investors, excluding the entity that triggers the rights issuance.
In a statement explaining the move, Southwest said that Elliott has made regulatory filings that would provide the hedge fund with the flexibility to acquire a significantly higher percentage of the airline's stock beginning on July 11.
Southwest also noted that it can't be certain of Elliott's current full position in the airline, since Elliott hasn't reported that information to the Securities and Exchange Commission.
Travel Weekly has asked Elliott for comment. The company sketched out a plan last month that it argues can drive Southwest shares to $49 over the next year. Shares have generally traded at around $30 for the past month.
Elliott's plan would involve the immediate removal of Jordan; the appointment of more board members who are independent of current leadership and who have experience at other airlines; the hiring of a new CEO along with the implementation of a plan to replace Kelly as board chairman; and the undertaking of a comprehensive business review geared toward determining what steps Southwest must take to modernize its commercial and operational models in order to restore industry-leading profitability.
Jordan has said he won't resign and the Southwest board has stated its support of current management.
Driving the discussion are Southwest's disappointing results in recent years. In 2018, the carrier's profit margin was tops among the largest four U.S. airlines. It is projected to be the worst this year, trailing Delta, United and American. Southwest's stock is hovering at around 50% of its price before the pandemic.
To reverse course, Southwest has implemented a new operational action plan and has boosted IT investment to address technology shortfalls. The carrier has also scaled back capacity plans and has signaled that changes could be coming to its unique seating model, in which seats aren't assigned, as well to its cabins, which are configured with just one class and do not have extra-legroom seats.
Such changes could boost Southwest's potential to earn ancillary revenue.