It has been just five months since Southwest rolled out a three-year transformation plan geared toward increasing its financial performance and appeal to investors. And it has been just four months since the airline reached an agreement with insurgent shareholder Elliott Investment Management that averted a proxy battle in exchange for placing five Elliott-selected candidates on a reconstituted 13-member Southwest board of directors.
But recent personnel moves at Southwest suggest that Elliott has already grown antsy with the pace and direction of airline's transformation, analysts say.
"If you're Elliott, what you want is a three-month plan," consultant Bob Mann of RW Mann and Co. said, referencing the quick-hitting business model of the powerful hedge fund. "For them, three years is much longer than you want to be there."
Southwest's transformation plan is aimed at achieving $4 billion in incremental revenue and an operating margin of 10% by 2027. That would be up from a margin of 1.2% in 2024.
Core revenue-focused elements of the plan include the introduction next year of assigned seating and extra-legroom seats. Savings were to come from a variety of initiatives, including minimizing hiring, increased fleet utilization through the recent launch of red-eye flights and a series of steps geared toward reducing aircraft turn times.
But on Feb. 17, Southwest made a major move that hadn't been articulated in the plan, instituting the first mass layoffs in company history when it announced that it would dismiss approximately 1,750 corporate-level employees, including directors and senior leadership -- a step the airline expects will result in $300 million in savings next year. That decision was followed just days later by the resignation announcement of Ryan Green, effective April 1, who just last summer had been tapped as the company's chief transformation officer. CFO Tammy Romo, another key player in the transformation, had announced her pending April 1 retirement in early January.
Those two resignations may signal internal discord, investment analysts at Deutsche Bank suggested in a Feb. 21 report. "One possibility is that the company's new board of directors and one of its largest shareholders, activist investor Elliott Investment Management, may wish to pursue a different strategic direction," they wrote.
Bloomberg Intelligence aviation analyst George Ferguson said the signs point toward Elliott pushing for more action. Green and Romo, though, might not have seen eye-to-eye with the new board.
"Some people will say, 'This is not something I signed up for.' I kind of chalk Romo and Green up to that," Ferguson said.
When it took a position in Southwest last June, Elliott set out a share price target of $49 over the coming 12 months, up from approximately $30 at the time. As of late February, the stock had barely budged, continuing to trade at around $30.
Extra-legroom seats not enough?
In 2024, Southwest saw a revenue increase of 5.3% year over year while reporting net income of $261 million, but operating margins lagged far behind industry leaders Delta and United, and behind American, as well.
Deutsche Bank analysts wrote that one of Southwest's biggest ongoing challenges is that it is not capturing its fair share of industry revenue.
"Even after incorporating the revenue initiatives thus far under its transformation plan, we see the airline actually losing ground to the industry leaders over the next three years," they said.
As such, they added, premium offerings beyond the announced extra-legroom seats will be essential.
Meanwhile, Southwest's cost per mile flown, Ferguson pointed out, is higher than that of low-cost competitors and not far off the levels of the Big Three carriers. But those airlines can make up for higher costs with extra revenue from first class and business class, which Southwest does not offer.
The recent layoffs and other initiatives are geared toward eventually tamping down cost growth, but for the current quarter, Southwest expects costs per available seat mile, excluding fuel, to be up 7% to 9% compared to last year.
The combination of those dynamics could well be driving impatience at Elliott, but the firm hasn't lost interest. As of Feb. 19, Elliott had a 13.4% stake in Southwest, and on Feb. 18 the company entered into an amended agreement with Southwest enabling its maximum stake to reach 19.9%, instead of a previous 14.9% cap.
How about an acquisition?
With its increasing influence, Mann said, Elliott could be pushing for the airline to more aggressively leverage its industry-leading balance sheet. He referred to recent rumors and speculation that Southwest is looking to grow through acquisition of another U.S. carrier (JetBlue, Spirit and Breeze have been mentioned), a prospect that some believe could more easily achieve regulatory approval under the Trump administration than during the Biden presidency.
"It seems to be that a lot of the changes are around removing people who might impede future activities which would utilize more of the available balance sheet," Mann said.