Southwest Airlines Co. (LUV) shares experienced a 3% dip during Thursday morning trading in New York, despite the airline announcing better-than-expected third-quarter earnings and reaching a pivotal agreement with activist investor Elliott Investment Management. Although these developments would normally be seen as positive catalysts for the stock, investor sentiment seems to have been dampened by concerns surrounding potential Boeing delivery delays.
Southwest Earnings Exceed Expectations
Southwest posted an adjusted earnings per share (EPS) of $0.15, surpassing analyst estimates, which had predicted a breakeven quarter. Revenue also exceeded expectations, reaching $6.87 billion compared to the forecasted $6.735 billion, according to Benzinga Pro data. The airline attributed its earnings beat to stronger-than-anticipated travel demand, showcasing Southwest’s robust financial performance amidst recent challenges. However, the market’s reaction was muted, indicating that investors were more focused on other concerns.
Elliott Deal: Board Shakeup and Settlement
In addition to its earnings report, Southwest successfully concluded a prolonged and contentious boardroom battle with Elliott Investment Management by agreeing to a board restructuring. As part of the deal, six new directors will join Southwest’s board, including five nominees from Elliott. Notably, Elliott will not gain majority control of the board, a significant shift from its initial demands.
Elliott initially acquired a $2 billion stake in Southwest in June, seeking strategic changes and criticizing CEO Bob Jordan and executive chairman Gary Kelly for what the fund perceived as years of underperformance. Elliott has since withdrawn its request for a special shareholders meeting after Southwest agreed to the board changes, which include commitments around voting, confidentiality, and standstill agreements.
As part of the agreement, Gary Kelly, executive chairman and former CEO of Southwest, will expedite his retirement and leave next month, while Bob Jordan will retain the role of CEO. The board will expand to 13 members, including four former airline CEOs. Elliott’s nominees joining Southwest’s board include:
* David Cush, former CEO of Virgin America
* Gregg Saretsky, former CEO of WestJet
* Sarah Feinberg, former MTA Chair
* Dave Grissen, former Marriott International (MAR) executive
* Patricia Watson, experienced board director
* Pierre Breber, former CFO of Chevron Corp. (CVX)
These changes represent the largest number of board seats Elliott has ever gained through a settlement in the U.S. market. During an interview with CNBC, CEO Bob Jordan expressed optimism about the new board members, stating, “They’re going to make great additions to the board that each bring unique skills.” He also reassured that the newcomers are committed to Southwest’s culture, which he believes sets the airline apart from its competitors.
In a press release, Elliott partner John Pike and portfolio manager Bobby Xu stated, “We are pleased to have come to an agreement with Southwest… They are all highly qualified and will bring diverse skills and backgrounds to the task of overseeing Southwest under the leadership of a new Board Chairman.”
Boeing Strike Threatens 2025 Deliveries
While the Elliott deal resolves internal management issues, Southwest still faces external challenges, particularly related to Boeing Co. (BA). On Wednesday, machinists rejected Boeing’s latest labor proposal, with 64% voting against it, extending a strike that has disrupted most of the company’s Seattle-area production for over five weeks. “This rejection adds further uncertainty, costs, and recovery delays as the strike approaches day 40. We anticipate further concessions of wages will be required for a deal to pass,” Bank of America analyst Ronald J. Epstein said in a note Thursday.
Southwest CEO Bob Jordan told CNBC that the ongoing strike at Boeing represents a potential risk to aircraft deliveries planned for 2025. Jordan noted that Southwest had already planned for about 20 aircraft deliveries in 2024 and had received 19 planes so far, remaining largely on track. The manager cautioned that if the Boeing machinists’ strike continues, the airline may have to replan its 2025 delivery schedule.