Too Little, Too Late: Activist Investor Elliott Remains Unimpressed With Southwest’s Plan to Eliminate Open Seating

Activist investor Elliott Investment Management says that radical changes coming soon to Southwest Airlines designed to shore up its lagging financial performance are “too little, too late” and that the Dallas-based carrier desperately needs a new senior leadership team.

Last month it was revealed that Elliott had quietly built a stake in Southwest with a view to securing a seat on the board and forcing through major changes at the much-loved but financially underperforming airline.

As an activist investor, Elliott’s strategy is to invest in companies with the very purpose of pushing for major changes – either in the management or the company’s strategy – in order to improve the stock price.

Southwest’s senior leadership team and board of directors have fought back against Elliott, claiming that it already had a plan to turn around the airline’s fortunes and that Elliott’s interference is unwarranted and unneeded.

On Thursday, Southwest revealed how it planned to improve its financial performance by ditching its iconic open seating policy, introducing premium extra legroom seating options and introducing red-eye flights for the first time in its more than 50-year history.

The plan did not, however, impress Elliott.

“Southwest’s announcement of revenue-enhancement initiatives, purporting to offer assigned seating, premium seating options and redeye flights, comes more than a decade late, and after a 50% decline in its share price over the past three years,” the activist investor slammed.

“This new plan is being proposed by the same leadership team that has presided over a series of failed measures to improve performance, repeated operational missteps and poor financial results,” a statement from Elliott continued.

“This failed leadership team’s announced initiatives – obvious attempts at self-preservation – are simply not credible. Too little, too late is not a strategy. It’s time for new leadership”.

As an indication of how much pressure Southwest’s leadership team is under, the airline announced its new customer experience and financial improvement initiatives with very few details attached.

As it stands, Southwest hasn’t said how much it might cost to pre-assign a seat or the cost of booking a premium extra legroom seat.

Many analysts believe Southwest has doggedly held onto outdated policies simply because that’s the way that the airline has always done things but at the cost of losing out to rivals who have innovated and adjusted their business models to keep pace with customer demand.

Even Southwest’s own research found that 80% of existing customers and 86% of potential customers wanted assigned seating and that the carrier’s open seating policy was a major factor in passengers choosing to fly with a rival airline.

Although it sounds like Southwest has only recently undertaken this research, the findings shouldn’t have come as too much of a surprise. Europe’s largest low-cost airline, Ryanair, for example, abandoned open seating more than 10 years ago after coming to the conclusion that it alienated customers.

Elliott is, however, yet to outline exactly what it would do to improve Southwest’s financial performance. In the meantime, the Southwest board has introduced a ‘poison pill’ in a bid to prevent Elliott building its stake in the airline any further.