Southwest Airlines Company · NYSE:LUV
Southwest Airlines — Proxy Contest (August 2024)
78 slides from Southwest Airlines's proxy contest presentation, Aug 14, 2024
Slide 1: Letters
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Slide 2: Letter to the Board of Directors, June 10, 2024
June 10, 2024 The Board of Directors Southwest Airlines Co. 2702 Love Field Drive Dallas, Texas 75235 Dear Members of the Board: We are writing to you on behalf of funds managed by Elliott Investment Management L.P. (together with such funds, “Elliott” or “we”). Elliott has made an investment of app
Slide 3: Letter continued: leadership and Board accountability
Southwest’s Executive Chairman and its CEO, who have spent a combined 74 years at the Company, have presided over a period of severe underperformance, and they have demonstrated that they are not up to the task of modernizing Southwest. Since his appointment, Southwest CEO Bob Jordan has delivered u
Slide 4: Comprehensive Business Review and $49 price target
(3) Undertake a Comprehensive Business Review: Southwest should form a new management and Board-level committee to evaluate all available opportunities to rapidly restore the Company’s performance to best-in-class standards. This review would modernize Southwest’s strategy and operations with a focu
Slide 5: Letter to the Board of Directors, July 8, 2024
July 8, 2024 The Board of Directors Southwest Airlines Co. 2702 Love Field Drive Dallas, Texas 75235 Dear Members of the Board, We write to you again on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, with its affiliates, “Elliott” or “we”). The purpose of today’s lette
Slide 6: Concerns over poison pill and half-measures
simply, we are seeking to strengthen oversight, upgrade management and improve Company performance. Preventing shareholders who do not support the Company’s failed leadership and oversight from purchasing additional stock reflects exceptionally poor governance and underscores the immediate need for
Slide 7: Shareholder feedback quotes
“I have zero confidence this team can get this right and certainly not in the timeframe that is needed. I rarely call for wholesale change at a company, but that is what is needed here.” – Top 10 Active Shareholder “Having the current CEO drive the process for a new strategy is not a good idea. I th
Slide 8: Employee and former employee feedback
investor basically saying everything we’ve said… Right now we just can’t [get behind the Company] because we’re again disdained and there’s very little concern right now at the C-suite, you know, outside of their jobs. There’s not a concern for the employees. And that’s something we can never forget
Slide 9: Risk of Board half-measures
In fact, one of the biggest risks we see to Southwest in the short term would be the announcement by the Board of a package of half-measures with the objective of further entrenching itself and avoiding more fundamental change – such as, for example, replacing the current CEO without running a compr
Slide 10: Entrenchment maneuvers and next steps
As one of the Southwest’s largest investors, Elliott is focused on the sustainable, long-term success of the Company. This Board, however, refuses to hold itself and the management team accountable for the long-term value destruction endured by Southwest’s shareholders. Indeed, the “poison pill” ann
Slide 11: Presentation
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Slide 12: Stronger Southwest
ELLIOTT® Stronger Southwest 7” June 10, 2024 StrongerSouthwest.com
Slide 13: Disclaimer
Disclaimer THIS PRESENTATION IS FOR DISCUSSION AND INFORMATIONAL PURPOSES ONLY. THE VIEWS EXPRESSED HEREIN REPRESENT THE OPINIONS OF ELLIOTT INVESTMENT MANAGEMENT L.P. AND ITS AFFILIATES (COLLECTIVELY, “ELLIOTT MANAGEMENT”) AS OF THE DATE HEREOF. ELLIOTT MANAGEMENT RESERVES THE RIGHT TO CHANGE OR MO
Slide 14: Executive Summary
01 Executive Summary 02 Southwest Has Underperformed 03 Southwest Requires Change 04 A Stronger Southwest ELLIOTT 3
Slide 15: About Elliott Investment Management
About Elliott Investment Management Founded in 1977, Elliott Investment Management L.P. (together with its affiliates, “Elliott”) is one of the oldest private investment firms of its kind under continuous management Elliott’s Approach to Active Investing Extensive Analysis: Prior to making any inv
Slide 16: Our Analysis of Southwest
Our Analysis of Southwest Elliott has sought the perspectives of industry executives and advisors to help us evaluate the Company’s strategy, market position, operations and opportunities to enhance performance Former Employees Industry Shareholder Customer and Industry Execs Advisors Survey Study W
Slide 17: Southwest At a Glance
Southwest At a Glance Southwest is the largest domestic carrier in the U.S., serving more than 137 million customers across a network of 121 destinations in 2023 Leading Domestic Carrier Robust Domestic Network Largest domestic carrier in the U.S. by #1 market share in 22 of the top 50 U.S. pass
Slide 18: Southwest's Remarkable Legacy
Southwest’s Remarkable Legacy In 1971, Southwest introduced low-cost air travel to its customers. The model was highly innovative for its time and facilitated decades of consistent profitability and growth Innovative Best-in-Class Sustainable Consistent Model Efficiency Growth Profitability Began
Slide 19: If you don't change, you die
“ If you don’t change, you die… If things change faster outside your company than they change inside your company, you’ve got something to worry about… What we’re talking about here is your future. If you don’t change, you won’t have one. Southwest Founder Herb Kelleher, March 2014 “ ELLIOTT Source:
Slide 20: The First Years: An Innovative Leader
The First 30 Years: An Innovative Leader Southwest was once an industry leader with an innovative model and a unique customer-facing approach À Invented the Low-Cost Carrier Model À Led on Customer Segmentation Innovative model became the blueprint for many of the Introduced two-tier pricing for off
Slide 21: Southwest Must Change
Southwest Must Change Southwest’s disappointing performance over the last several years highlights the need for new leadership and an evolution of the Company’s strategy Ô Market Value Lost more than 50% of its market value in last three years Ô Stock Price On pace for its 5th straight year of negat
Slide 22: Southwest's Challenges are Addressable
Southwest’s Challenges are Addressable Southwest has the fundamental attributes necessary to restore its industry-leading position. With the right leadership and strategy, we believe today’s challenges are readily addressable Ï Robust Network and Customer Relevance Largest domestic airline by passen
Slide 23: A Stronger Southwest starts with improved leadership
A Stronger Southwest starts with improved leadership and new perspectives. The Company must refresh its Board, upgrade its leadership and embark on a comprehensive review of its strategy and operations À Board Change Significant Board change including new independent directors with external airline
Slide 24: Upside from a Stronger Southwest
Upside from a Stronger Southwest With the right leadership, Southwest has clear line-of-sight to improving performance and reclaiming its industry-leading position $49 Ò Reestablishes Leadership Credibility Ò Modernizes Strategy Outdated Restores Best-in- Ò Class Margins $28 Higher Profit Sharing Ò
Slide 25: An Exceptional Turnaround Opportunity
An Exceptional Turnaround Opportunity Restoring best-in-class performance should drive substantial share price upside Estimated Share Price Upside Upside at Realized 202 2025E 25E EBITDAR Margin Best-in-Class Best- Best -in in--Class +87% +77% Improvement +67% +57% +47% +38% EBITDAR Margin 15% 5% 16
Slide 26: Southwest Has Underperformed
01 Executive Summary 02 Southwest Has Underperformed 03 Southwest Requires Change 04 A Stronger Southwest ELLIOTT 15
Slide 27: Melius Research quote on Southwest's slow pivot
“ What’s different [for Southwest] vs. some of the smaller domestic airlines is that Southwest has the network depth & breadth, balance sheet and brand to pivot quickly. Unfortunately, they have been slow to move, while industry costs ballooned. Given the lack of pivot, the revenue outcomes for Sout
Slide 28: Shares Have Deeply Underperformed
Shares Have Deeply Underperformed Southwest has substantially underperformed peers and the S&P 500 over all relevant time periods. Returns rank in the bottom 10% of the S&P 500 over the last two and four years and in the bottom 5% over the last three and five years Southwest Cumulative Total Shareho
Slide 29: Extraordinary Decline in Southwest's Value
Extraordinary Decline in Southwest’s Value Southwest’s enterprise value has declined 44% since 2019, reflecting a substantial diminution in investors’ views of Southwest’s future earnings power. In contrast, peer enterprise values are only 5% below 2019 levels on average(1) Southwest Year-end Enterp
Slide 30: Southwest's Issues Are Unique
Southwest’s Issues Are Unique While peer EBITDAR is expected to be in-line with or meaningfully exceed pre-COVID levels, Southwest EBITDAR is expected to be nearly 50% lower despite record travel demand EBITDAR vs. 2018(1) $ in Billons 2018A 2024E $9.7 $7.9 $8.2 $6.9 $6.8 $6.3 $4.5 $2.4 -48% “ These
Slide 31: From Best- to Worst-in-Class Margins
From Best- to Worst-in-Class Margins In 2018, Southwest had best-in-class margins. Today, Southwest’s margins are the lowest in the peer group and approximately 900 basis points below best-in-class EBITDAR Margins vs. Peers(1) 2018A 2024E 21% 18% 17% 15% 15% 14% 12% 8% -1,300 bps Source: Company fil
Slide 32: Substantial Revenue Underperformance
Substantial Revenue Underperformance Southwest’s dated commercial strategy has resulted in the worst unit revenue performance among its peers since 2018 Unit Revenue Growth vs. Peers (2018 – 2023) Unit Revenue Growth vs. Peer Domestic Average Revenue Per Available Seat Mile or “RASM”(1) Passenger Re
Slide 33: Bottom-tier Unit Cost Performance
Bottom-tier Unit Cost Performance Southwest has delivered peer-worst unit cost performance over the past five years. Poor cost control undermines Southwest’s competitive positioning as a low-cost carrier Change in Unit Costs vs. Peers (2018 – 2023) Southwest has lost the “ Cost Per Available Seat Mi
Slide 34: December 2022 Operational Meltdown
December 2022 Operational Meltdown Southwest’s operational meltdown stranded 2 million customers over the holidays and drove 30%+ share price underperformance relative to peers over 2 months(1) “ Indexed Relative Share Price Performance vs. Peers Its Reputation in Tatters, Southwest Aims 100 1 South
Slide 35: Poor Performance Has Cost Employees
Poor Performance Has Cost Employees Southwest’s poor financial performance has cost employees tens of thousands of dollars on average due to lower profit sharing and declines in the value of Southwest stock held by retirement plans Annual Profit Sharing Value of Southwest Stock Held by Retirement Pl
Slide 36: Southwest Requires Change
01 Executive Summary 02 Southwest Has Underperformed 03 Southwest Requires Change 04 A Stronger Southwest ELLIOTT 25
Slide 37: J.P. Morgan quote on turnaround
“ We’d obviously welcome a substantive turnaround plan from Southwest… In our opinion, bona fide turnarounds often include meaningful changes in network composition, fleet overhauls, and revisions to business models. Management turnover is sometimes a component, as are changes in pricing philosophy…
Slide 38: More Time Will Not Fix Southwest's Issues
More Time Will Not Fix Southwest’s Issues Southwest requires decisive action and stronger oversight to restore estore confidence after years of deteriorating execution Ô 4+ years of consistent FAILURE TO EVOLVE STRATEGY disappointments and self-inflicted performance deterioration Investors appear to
Slide 39: Four Years of Consistent Disappointments
Four Years of Consistent Disappointments Southwest has underperformed peers on 17 of its last 20 significant earnings events 1-Day Stock Performance vs. Peers After Significant Earnings Events 2.1% 1.2% 0.2% (0.3%) (0.1%) (0.7%) (1.5%) (2.5%) (2.6%) (2.9%) (3.2%) (4.8%) (4.8%) (5.0%) (6.4%) (7.3%) (
Slide 40: CEO Commentary Disconnected From Reality
CEO Commentary Disconnected From Reality In the face of deteriorating financial performance, CEO Bob Jordan claims that performance is “great” and that he is “very proud” Event Decline in EBIT Consensus(1) Management Perspective on Performance “But for the ops disruption, we would have had a very st
Slide 41: Leadership Has Ignored Calls for Change
Leadership Has Ignored Calls for Change Investors and research analysts have been calling for changes for years, but Southwest’s management and Board have pressed forward with incrementalism and inaction “ Quite frankly, I think [regaining the high ground] is going to require evolution. We’ve been c
Slide 42: Entrenched Views on Strategy
Entrenched Views on Strategy Southwest’s leadership has written off key commercial innovations and revenue opportunities across the airline industry for the last 15 years Management Has Historically Ruled Out Industry-Standard Commercial Initiatives… Until recently: “We are not looking at assigning
Slide 43: Management Opted for Small Changes
Management Opted for Small Changes… To date, Southwest’s approach has focused on incrementalism rather than an unbiased evaluation of all available opportunities Initiatives Portrayed as Transformative Are Actually Incremental “ Larger overhead bins? Improved WiFi? “ We have transformed before, addi
Slide 44: Which Failed to Bolster Profits
Which Failed to Bolster Profits Management’s initiatives have not been enough to reverse Southwest’s declining profitability despite management’s frequent reaffirmation that they are delivering Incrementalism Has Not Bolstered Profitability +$1.0B - $1.5B $5.7B +$1.0B - $1.5B 90% Lower $3.2B “… Abou
Slide 45: 2023 Cost Execution Missed Targets
2023 Cost Execution Missed Targets… Management revised unit costs up four times in 2023. Poor execution has substantially eroded management’s credibility and damaged Southwest’s competitive positioning as a low-cost carrier Unit Cost Guidance Revisions in 2023 FY’23 Unit Costs Excluding Fuel, Profit
Slide 46: And 2024 is Off to an Even Worse Start
And 2024 is Off to an Even Worse Start Only 11 months ago, management said it was “absolutely committed” to driving unit costs down in 2024. Today, management is guiding to a 7-8% increase, representing $1.7B of incremental costs Unit Costs have Substantially Missed Expectations “We are very focused
Slide 47: Simplistic Growth Strategy is Failing
Simplistic Growth Strategy is Failing A significant increase in unprofitable flying driven by a growth strategy focused on capacity expansion (rather than product innovation) appears to have driven substantial unnecessary losses Substantial Increase in Uneconomic Flying Example of Growth Ambition: H
Slide 48: Leadership Must Be Upgraded
Leadership Must Be Upgraded We believe new leadership is required at Southwest after years of consistent disappointments and a steadfast commitment to the status quo. The Executive Chairman and CEO, who have spent a cumulative 74 years at Southwest, have presided over a period of stunning underperfo
Slide 49: Management is Viewed as Worst-in-Class
Management is Viewed as Worst-in-Class In an independent survey, Southwest ranked last on every metric and investors expressed low confidence in management’s capabilities Shareholders Rate Southwest Worst Among Peers Independent Shareholder Survey Cost & Strategy Management Operations Monetization I
Slide 50: Analysts Have Given Up on Southwest
Analysts Have Given Up on Southwest While once a consensus “Buy”, sentiment on Southwest has substantially deteriorated amid poor execution and failed efforts to get back on track Analyst Ratings in December 2022(1) Analyst Ratings in June 2024(1) BUY (4) 20% 75% HOLD (10) BUY (15) SELL (5) HOLD (5)
Slide 51: A Stronger Southwest
01 Executive Summary 02 Southwest Has Underperformed 03 Southwest Requires Change 04 A Stronger Southwest ELLIOTT 40
Slide 52: Board Changes, Upgraded Leadership, Comprehensive Business Review
Board Changes Southwest’s Board needs new directors with the relevant experience to challenge the current strategy and the Ò independence to hold management accountable Upgraded Leadership Southwest must bring in new leadership from outside of the Company to improve operational execution and lead Ò
Slide 53: Board Change is Needed at Southwest
Board Change is Needed at Southwest We believe Southwest’s Board lacks the airline industry experience and independence required to hold management accountable and drive necessary strategic changes Problematic Board Composition and Independence No Independent Directors with Airline Operating Experie
Slide 54: An Improved Southwest Board
An Improved Southwest Board Southwest needs new independent directors with relevant expertise to challenge entrenched thinking, drive strategic changes and hold management accountable Independent Independent Independent Independent Independent Independent Independent Independent New Independent Dire
Slide 55: New Leadership is Needed
New Leadership is Needed Lack of outside perspectives and long tenure have contributed to Southwest’s stagnation. Leadership from outside of Southwest is necessary for the strategy to evolve Tenure of Southwest Executives Gary Kelly, Bob Jordan, Executive Chairman President & CEO Years at Southwest
Slide 56: Upgraded Leadership
Upgraded Leadership We believe Southwest needs new leadership from outside the Company that has the capabilities to improve operational execution and drive strategic changes Relevant Transportation Industry Experience Strong Operational Capabilities Track Record of Shareholder Value Creation ¼ Updat
Slide 57: Comprehensive Business Review
Comprehensive Business Review A new board-level committee, assisted by independent advisors, will lead a comprehensive business review to modernize Southwest and restore best-in-class profitability Review Committee Focus OUTPUT OF REVIEW À Improved Unit Revenue • Commercial C Strategy À Lower Unit C
Slide 58: The Opportunity at Southwest
The Opportunity at Southwest We expect 67% - 87% share price upside as Southwest restores its best-in-class margins and we believe a turnaround is eminently achievable Share Price Upside ¼ Southwest’s return to $ in Billions Unless Otherwise Noted Best-in-Class best-in-class margins Realized EBITDAR
Slide 59: The Best Path Forward for Employees
The Best Path Forward for Employees We believe a Stronger Southwest would deliver substantially more value to employees from higher profit sharing driven by enhanced profitability and better share price performance Annual Profit Sharing Expense(1) Value of Retirement Plan’s Southwest Stock(2) c.$790
Slide 60: The Stronger Southwest plan addresses the Company's key issues
The Stronger Southwest plan ambitiously addresses the Company’s key issues and delivers a brighter future for Southwest Lagging Unit Revenue, Leadership Unwilling $28 Share Price Below Underperforming Unit Costs to Change March 2020 Lows and Eroded Profitability Comprehensive Review to Board Change
Slide 61: Next Steps
Next Steps We believe that Southwest should begin the process of change immediately, enabling the Company to be in a position to update shareholders on its go-forward strategy by year-end 2024 04 03 Undertake comprehensive 02 Commence business review search for n new 01 Appoint new, overseen oversee
Slide 62: Contact Us
Contact Us Website | StrongerSouthwest.com Investors | Investors@StrongerSouthwest.com Media | Casey Friedman 'LUHFWௗ Email: cfriedman@elliottmgmt.com ELLIOTT 51
Slide 63: Press Releases
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Slide 64: Elliott Sends Letter and Presentation to the Board of Southwest Airlines
Media Contact: Casey Friedman Elliott Investment Management L.P. (212) 478-1780 cFriedman@elliottmgmt.com Elliott Sends Letter and Presentation to the Board of Southwest Airlines Discloses Approximately $1.9 Billion Position Calls for Upgraded Leadership and Comprehensive Business Review Believes So
Slide 65: Elliott's three recommendations for Southwest
As part of its “Stronger Southwest” plan, Elliott outlined three recommendations to improve the Company’s performance: 1) Enhance the Board 2) Upgrade Leadership 3) Undertake a Comprehensive Business Review By executing on the Stronger Southwest plan, Elliott believes the Company can return to its r
Slide 66: Letter text: industry profitability and Southwest decline
shutdowns. And while the U.S. airline industry is seeing record revenues and peer airlines are enjoying very strong profitability, Southwest’s 2024 EBITDAR is expected to be nearly 50% lower than 2018 levels. In addition to negative returns for shareholders, this disappointing financial performance
Slide 67: Letter text: lack of accountability after the meltdown
The lack of accountability is best reflected in the Company’s response to the December 2022 operational meltdown. In a clear display of poor leadership, CEO Bob Jordan declined to testify in front of Congress after the meltdown, despite attending a company rally just 40 miles away in Baltimore the p
Slide 68: Letter text: next steps
improve execution. It drives the efficiency required to continue offering low fares. And it facilitates the necessary investments to run the reliable operation that customers and employees expect. Next Steps Southwest became a leading airline by innovating and executing. Today, Southwest’s failure t
Slide 69: Elliott Statement on Southwest Revenue Guidance Reduction
Media Contact: Casey Friedman Elliott Investment Management L.P. (212) 478-1780 cFriedman@elliottmgmt.com Elliott Statement on Southwest Airlines’ Revenue Guidance Reduction WEST PALM BEACH, FLA. (June 26, 2024) – Elliott Investment Management L.P. (“Elliott”), today released the following statement
Slide 70: Elliott Sends Letter to the Board, Responds to Poison Pill
Media Contact: Casey Friedman Elliott Investment Management L.P. (212) 478-1780 cFriedman@elliottmgmt.com Elliott Sends Letter to the Board of Southwest Airlines Has Received Overwhelmingly Supportive Feedback about Call for Leadership Change Responds to Company’s Adoption of Shareholder-Unfriendly
Slide 71: Elliott's three-point path forward
Elliott again outlined the following path to a higher-performing future for Southwest: 1. Enhance the Board of Directors 2. Upgrade Leadership 3. Undertake a Comprehensive Business Review Elliott indicated that it is open to collaborating with the Board on a path forward, but absent alignment Elliot
Slide 72: Board entrenchment: poison pill and new director
x On July 3, this Board put its own self-interest ahead of the Company’s by pursuing the entrenchment strategy of adopting an antiquated and shareholder-unfriendly “poison pill” to prevent Elliott from increasing its stake above 12.5%. x And today, the Board announced that it had appointed a handpic
Slide 73: Shareholder feedback quotes
shared by some of Southwest’s largest investors as part of the survey, with such sentiments having been confirmed in our most recent discussions: “The CEO is a headwind to a turnaround. Firing him is the tailwind.” – Top 10 Active Shareholder “I would rate them as the worst-performing management tea
Slide 74: Other constituents' concerns with leadership
Other Constituents Have Also Expressed Deep Concerns with Southwest’s Leadership In addition to hearing from shareholders, we have received feedback on our views both publicly and privately from some of Southwest’s employees. For an illustrative example of the feedback we’ve heard, consider the sent
Slide 75: The Path Forward
This candid feedback is only a small sample of what we have received so far. We believe sentiment regarding Southwest’s Board and management is particularly negative among these constituents because, in their view, Southwest’s leadership has ignored their feedback for years and stood idly by as the
Slide 76: Upgraded Leadership and Comprehensive Business Review
2. Upgraded Leadership: The Company should immediately announce a CEO transition and select an interim CEO who can earn the trust of investors. This person could be one of the newly appointed Board members. Following a reconstitution of the Board, Southwest should form a CEO search committee compose
Slide 77: About Elliott
About Elliott Elliott Investment Management L.P. (together with its affiliates, “Elliott”) manages approximately $65.5 billion of assets as of December 31, 2023. Founded in 1977, it is one of the oldest funds under continuous management. The Elliott funds' investors include pension plans, sovereign
Slide 78: Elliott Statement on Southwest Revenue Enhancement Initiatives
Media Contact: Casey Friedman Elliott Investment Management L.P. (212) 478-1780 cFriedman@elliottmgmt.com Elliott Statement on Southwest Airlines’ Revenue Enhancement Initiatives WEST PALM BEACH, FLA. (July 25, 2024) – Elliott Investment Management L.P. (“Elliott”), today released the following stat