Elliott Sends Open Letter to Its Fellow Southwest Shareholders

$LUV

Reiterates Framework for a Comprehensive Solution at Southwest

Calls for Southwest Board to Put Company’s Best Interests Ahead of Leadership’s Personal Interests

Dear Fellow Southwest Shareholders,

We are writing to you today on behalf of Elliott Investment Management, L.P (“Elliott”) because we know that you share our desire for Southwest Airlines Co. (“Southwest” or the “Company”) to restore its best-in-class performance. We expect, and the Company’s constituents deserve, nothing less.

The challenges Southwest faces today are immense: Years of mismanagement by Executive Chairman Gary Kelly and CEO Bob Jordan have caused the Company – and your investment – to decline in value and consistently underperform its significant potential. Over the three years leading up to the disclosure of our position in Southwest in June, your investment in Southwest declined by more than 50%. The Company’s stock price has fallen to the depths that it reached during the COVID-related travel shutdowns in 2020. Shareholders are demanding better, and as one of the Company’s largest investors, we are leading an effort to arrest Southwest’s decline and return it to its rightful place as an industry leader.

Since we announced our intention to nominate ten highly qualified independent directors to Southwest’s Board,¹ Mr. Jordan – the same executive who presided over most of the aforementioned underperformance – has publicly and privately indicated that he intends to “fight” this necessary change to Southwest’s leadership and governance. And in recent weeks, Southwest has falsely stated that it has had no “engagement” from Elliott, while also making contradictory acknowledgements that Elliott met with Southwest’s management in Dallas in June and intends to meet with the Company again on September 9.

We have also learned that Mr. Kelly – who preceded Mr. Jordan as CEO and hand-picked Mr. Jordan as his successor – appears to be leading a hasty and reactive process to add new directors to Southwest’s Board in an all-too-familiar effort to entrench its current leadership. We have no doubt that Southwest will attempt to portray our decision not to participate in this sham process absent a comprehensive solution as further evidence of our unwillingness to engage.

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¹ Please see the Appendix for the bios of our exceptional nominees.

It has become apparent to us that Southwest’s leaders are trying to define “engagement” to mean a dialogue in which the single most critical question facing the Company today – who should lead it – is taken off the table and resolved in favor of the failed status quo.

We reject this self-interested definition of engagement. The reality is that we are eager to engage with Southwest’s Board on the urgent changes needed at the Company. But we believe that so long as the jobs of Mr. Jordan and Mr. Kelly remain sacrosanct – and they remain empowered to make every critical decision at the Company without proper oversight from a Board that has failed for years to hold them accountable – it is preferable to give shareholders a direct say on the question of who should be leading Southwest.

We still intend to meet with Southwest on September 9, and we remain hopeful that we will encounter at that meeting a willingness to put the central question of leadership on the table. But in the interest of providing transparency to shareholders, and dissipating the fog of past and future misleading statements by the Company, we are publishing our thoughts today on what a proper engagement path should look like to bring about the change that Southwest needs.

The Right Solutions for Southwest

Since we published our slate of highly qualified proposed candidates to refresh Southwest’s Board, Company representatives have attempted – without coordinating with us – to meet with our proposed directors as part of Mr. Kelly’s unilateral board refreshment process. Neither Elliott nor its independent director candidates see the benefit to Southwest or to us of participating in this Company-controlled process. When a Company has underperformed to the degree that Southwest has, no process conducted by its incumbent leadership without oversight can really be considered credible or legitimate. After all, allowing Mr. Kelly and Mr. Jordan to hand-pick most of the current Board is what led the Company to its current state, in which year after year of unacceptable results have been not just tolerated, but richly rewarded.

We remain open to engaging with Southwest on a comprehensive solution to the issues the Company is facing, and we expect that our candidates will meet with the Board when we are aligned on such a path. But the terms of this solution – and the process to get there – must be credible and legitimate.

Southwest’s Board still seems unable to grasp how profound the Company’s credibility deficit with investors has become. Southwest’s investors should not trust a board-refreshment process led by its incumbent leadership. In a private communication to employees, Mr. Jordan claimed that Elliott is just “one of many” investors, and that we are not “in charge.” Of course we aren’t, nor are we seeking to be.

But Mr. Jordan failed to mention that we are far from alone in our views: Shortly after we announced our intention to nominate ten highly qualified, independent directors to Southwest’s Board, one of our fellow large shareholders, Artisan Partners, took the rare step of immediately and publicly joining our call for leadership change, urging the Board “to work with Elliott to immediately bring on all or substantially all of the proposed nominees who can then chart a new course with a new Chairman and CEO.” Many of you, our fellow shareholders, have expressed such sentiments to us privately, and we have published a selection of the views we have heard in our previously released materials, available at StrongerSouthwest.com.

“A Battle for the Heart of Our Company”

The reality is that today, Southwest needs fresh, proven executive leadership from outside of the Company to restore its once-industry-leading performance and return it to its rightful place atop the airline industry. And it is arrogant and irresponsible in the extreme for Mr. Jordan to equate the preservation of his own job as “a battle for the heart of our company,” as he recently put it.

To be clear, Elliott shares the widely held belief that Southwest’s culture is vital to its continued success. All of Southwest’s shareholders, including Elliott, understand that, and no one wants to change the Company’s commitment to its exceptional employees and its culture of best-in-class customer service, which is what made this airline so beloved in the first place.

But the underlying message of Mr. Jordan’s recent rhetoric is that the culture of Southwest, which has powered its success for half a century, now seems to solely depend on the continued employment of its two top executives … who happen to be Mr. Kelly and Mr. Jordan. As Southwest’s thousands of hard-working employees know, Southwest’s culture is much bigger than these two individuals – and this culture deserves better stewards.

The culture that made Southwest great was borne of its aspiration to be the best low-cost airline in the United States – and to actually deliver on that goal by achieving superior operational performance, delighting customers and allowing employees to win alongside shareholders. Our mission is to restore this version of Southwest, and our proposed nominees, all leading industry executives, possess a broad range of experiences and skills designed to realize a version of Southwest that would make Herb Kelleher proud.

Mr. Jordan and Mr. Kelly seem to have a very different vision for Southwest and what its culture ought to be. In their version, Southwest stubbornly adheres to antiquated business practices from decades ago because that’s how management has always done things, and when changes are made, they come more than a decade late. In their version, Southwest is outmaneuvered by competitors that have continuously adapted and improved their product offerings to match customer preferences. In their version, a quarter like Q1 of this year, in which Southwest’s stock had its fifth-worst trading day in more than four decades, can be described by Mr. Jordan as “strong … despite the financial results,” while employees’ profit-sharing plans and retirement accounts hemorrhage their money with no relief in sight.

As the leaders of the Southwest Airlines Pilots Association put it recently in a memo to their members: “[N]obody in Dallas can admit that those tasked with fixing the problem are the ones who created it. We need bold leaders who have the creativity and insight to reexamine a corporate culture that has stagnated for years.”

We couldn’t have said it better. As large investors in Southwest with a significant stake in its future, we are confident that a reconstituted Board can find the right executive leaders from outside of the Company who will preserve all of the unique cultural attributes that have made Southwest great while fixing the more recent problems that have caused it to underperform its vast potential.

The Need for a Comprehensive Solution

Southwest’s leadership remains unwilling to admit its mistakes. It continues to say that it “has the right strategy, the right plan and the right team,” and it claims that things like the sudden announcement of assigned seating, which customers have favored for years, had nothing to do with Elliott’s recent demands for accountability. Instead, we are supposed to believe that these things were part of Mr. Jordan’s plan all along and the timing mere coincidence.

As we said when the assigned seating change was announced, “too little, too late” is not a strategy. In fact, the unilateral implementation by Southwest’s current leadership of a series of hasty, ad-hoc changes designed to boost its stock price in the short term represents a significant risk to the Company’s long-term well-being. We have seen this movie before, and it rarely ends well, because there is no one more short-term-oriented at the expense of future value than a beleaguered CEO trying to preserve his or her job.

Mr. Kelly and Mr. Jordan’s go-it-alone strategy has been tried, and it has failed. Shareholders simply do not trust this leadership team to “evolve the business,” when – in the words that the Company itself used in June to explain its eighth guidance reduction in the last 18 months – it is struggling with “complexities in adapting its revenue management to current booking patterns,” one of any airline’s most basic responsibilities. Simply put, this is an admission of business and vision failure.

Southwest must now put in place a comprehensive solution – not just some hand-picked new directors beholden to current management and a few long-overdue initiatives. Instead, it is time for a reconstituted Board to finally step up and put in place a transparent and credible process for addressing the challenges Southwest faces today.

The process that we have seen work most effectively in such situations is the formation of a new board-level committee with a mandate to conduct a comprehensive business review and drive transformational change – and that is what we believe is needed at Southwest. Working with new Southwest leadership, and drawing upon the experiences and perspectives of our eminently qualified set of new proposed directors, all independent, such a committee would be well positioned to support a company-wide modernization effort and ensure that Southwest is properly positioned – in both the near term and the long term – to achieve best-in-class performance.

The Path Forward

Instead of embracing responsible governance and a spirit of collaboration, Mr. Kelly and Mr. Jordan have resorted to entrenchment tactics – so-called “poison pills,” one-off announcements of long-overdue changes, and a rushed, unilateral Board refreshment process that lacks legitimacy. This is not how company leadership demonstrates confidence in its plans and establishes credibility with shareholders; it is how failed corporate leaders attempt to preserve their own jobs and perquisites, despite the wishes of the company’s constituents.

Mr. Jordan has claimed he wants to fight us – and presumably, by extension, all of the Company’s owners. Judging by his actions, we think that Mr. Jordan is not fighting for the “heart of the company,” as he claims, but rather the ability of himself and Mr. Kelly to continue to control Southwest, on their terms, for as long as they wish, regardless of the results they deliver. And the reason we are seeking such a significant degree of Board change is not because we want to be “in charge” at Southwest – which we would not be – but because Southwest’s current Board seems so plainly purpose-built to serve the interests of Mr. Kelly and Mr. Jordan.

Southwest is a storied American company that deserves to have the best stewards that its Board can possibly provide. It is also a public company, accountable to its owners. It is not an absolute monarchy. Southwest does not belong to Mr. Jordan and Mr. Kelly, but rather to its shareholders, a designation that importantly includes many of the Company’s employees.

We are seeking to engage with Southwest to create a better future for the Company, not for a fight. Fighting is a distraction from the business of creating value for shareholders, and our track record reflects that we much prefer working collaboratively with companies to drive value-enhancing change over engaging in proxy fights. If we end up having to nominate directors to the Board of Southwest and take this contest all the way to a special meeting, then it will be the first time we have had to conduct such a contest in the United States in more than seven years.

However, when we encounter corporate executives who believe that the companies they run are their personal fiefdoms and that they are entitled to run them – and to be paid handsomely to run them – unchallenged for as long as they want, no matter what results they deliver, then we are more than happy to provide a voice for those whose interests are being poorly served.

As Southwest has already announced, we are meeting with the Company’s representatives on September 9, and we look forward to hearing their views on the topics we have raised in this letter. In the interim, we expect the Company will try to distract shareholders with its own unilateral half-measures and divert from real engagement with shareholders. If so, so be it. Nevertheless, we are hopeful that we will find individuals on the Board willing to look past the personal interests of Mr. Jordan and Mr. Kelly in favor of what is best for Southwest and its many other constituents.

But in the absence of these leaders rising to the occasion, we are convinced the next step will be for you, Southwest’s owners, to have a direct say in your Company’s future.

Sincerely,

John Pike

Partner

Bobby Xu

Portfolio Manager

Source:

https://www.sec.gov/Archives/edgar/data/92380/000092189524001930/e663856_dfan14a-sa.htm