Elliott cannot solve Southwest’s Boeing problem

Elliott Investment Management has chosen a good time to pick a fight with Southwest Airlines. Shares in America’s largest domestic carrier by passenger volume have been grounded by softening US travel demand and turmoil at aircraft supplier Boeing. Coming into this week, the stock had lost more than a 10th of its value over the past 12 months and more than 50 per cent over the past three years to trade near its 2020 lows. By contrast, Delta Air Lines, which has a more international focus, is up 25 per cent over the past year and has long bounced back from the pandemic sell-off.

Enter Elliott. The activist investor this week revealed that it had amassed a $1.9bn stake in Southwest. It is calling for chief executive Bob Jordan to be replaced and the board of directors to be overhauled. It also wants a comprehensive review of the business. But there are limits to its campaign. Even this veteran activist cannot solve Southwest’s Boeing problem.

Southwest could do with some shaking up. Founded in Dallas by the late Herb Kelleher in 1967, the budget airline grew and found success by making flying more accessible to the masses. But more recently it has struggled with rising costs and stalled revenue growth. Despite pulling in record revenues during the first quarter, Southwest’s net loss widened to $231mn. Consensus forecasts put net income for this year at about a fifth of the level in 2017.

Southwest has already announced plans to slash jobs and close routes in a bid to cut costs. Elliott, which thinks Southwest shares could be worth $49 in 12 months, up 75 per cent, believes it can go further. It reckons the discount airline should follow rivals and start charging for assigned seating and other premium options. It also needs to overhaul an outdated IT system that led to an operational meltdown in 2022 and left more than 2mn passengers stranded. But this will take time and money.

Then there is Boeing. Southwest only flies one type of plane, the Boeing 737. The advantage to this is it helps keep maintenance costs low. But Southwest’s reliance on Boeing means it has been forced to reduce capacity and cut revenue growth guidance due to insufficient plane deliveries.

Southwest does benefit from a solid balance sheet. Debt, including operating lease liabilities, stood at just $8bn at the end of March. That is well below total cash and short-term investments of $11.5bn. But its turnaround will remain at the mercy of Boeing until the latter can get its safety and production issues in order.

pan.yuk@ft.com