Elliott activist campaign at Southwest Airlines puzzles shareholders

After Elliott Management revealed a $1.9 billion stake in Southwest Airlines in June, an initial rally in the stock quickly fizzled. Rather than sparking typical cheer on Wall Street, Elliott’s campaign, spelled out in a 50-page presentation, led to confusion and concern among investors and customers.

The hedge fund has taken activist stakes in more than 140 companies over the past three decades, according to data from 13D Monitor, but, like most activist investors, it has never targeted an airline.

Southwest, a Dallas-based company that started flying in 1971, has a unique culture that’s survived profitably for decades in a bruising industry.

While the company is suffering from margin deterioration and has seen its stock drop in each of the past four years, Elliott’s demand that Southwest fire CEO Bob Jordan and oust Chairman Gary Kelly has raised questions about whether the activist fully understands Southwest’s insular culture and the industry’s glacial pace of change.

Elliott hasn’t publicly specified changes it wants within Southwest’s offerings, calling instead for a business review.

“We are not entirely sure what Elliott has in mind,” analysts at Melius Research wrote in a report on June 10, the day the firm launched its campaign. “Until we know more, we are sticking with our Sell rating.”

Southwest has taken steps to defend itself. On Wednesday, the airline adopted a so-called poison pill that would activate if any shareholder acquired an interest of more than 12.5%, limiting Elliott’s ability to attain more control. Elliott says it currently has an interest of about 11% of the company.

Despite the potential wrinkle introduced by Southwest’s latest move, history offers some clues as to how this will play out. Several activism experts pointed to two of Elliott’s past targets for insight into the hedge fund’s strategy for Southwest: Suncor Energy in 2022 and Marathon Petroleum in 2019.

Elliott partner John Pike, who is now leading the Southwest campaign, was involved in the firm’s actions at both energy companies. While Suncor and Marathon resisted Elliott’s proposals, including leadership change and business reviews, Elliott still got much of what it wanted.

Elliott’s activist practice has helped it become one of the most successful hedge funds in the world, surpassing $65 billion in assets. The firm, which moved its headquarters in 2020 from New York to West Palm Beach, Florida, has only had two losing years in five decades. It often pushes companies to make dramatic changes, such as selling off businesses, firing executives or abandoning strategic plans.

In recent years, however, Elliott has also shown it can work collaboratively with management. Representatives have joined the boards of companies including Pinterest and Etsy. Texas Instruments CEO Haviv Ilan said in May…