Southwest Airlines stock pops on report of Elliott's $2B stake

Elliott has built a nearly $2 billion stake in Southwest Airlines (LUV), becoming one of the airline's largest investors. Elliott has issued a note calling for an enhanced board, leadership upgrade, and comprehensive business review. If permitted to make these changes, the firm sees Southwest returning 77% over the next 12 months to $49 per share.

Brian Sozzi and Seana Smith discuss Southwest's underperformance compared to other airlines.

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This article was written by Gabriel Roy

Video transcript

Elliott has built up a nearly $2 billion stake in struggling Southwest making it one of the airline's largest investors.

We should note Elliott and Southwest did not return my request for comment here.

Nonetheless, Elliott with a press release, Sean and, and imagine being the CEO of Southwest, you'll you'll wake today and you got a note from Elliott saying it wants to do three things you want to enhance the board.

And I should mind remind folks out there on that board is longtime CEO Gary Kelly, he's the executive chairman.

Elliott wants to upgrade leadership and undertake a comprehensive business review.

And if they are allowed to do all these things, they see Southwest potentially returning 77% over the next 12 months to $49 a share.

Tough day for Bob Jordan, CEO of Southwest, tough day for Bob Jordan, tough Monday morning here, waking up into this letter and also what I thought is very significant within this letter.

They're talking about the underperformance here of Southwest and really what we have seen the performance of Southwest compared to some of its rivals over the last several months, really over the last year and a half.

And Elliott making the case that because of that poor performance, they actually see Southwest as the most compelling airline turnaround opportunity within the last two decades.

So that really puts this opportunity, this investment opportunity in the eyes of Elliott uh into perspective here.

And I wanna bring up a conversation that I had several months ago and I was towards the end of last year, I had the opportunity to speak with Southwest Ceo Bob Jordan that was back in November about the airline's position, given some of those macro econo economic environment uh concerns right now.

And here's what he had to tell me about some of the trends that he's seen from consumers today.

I, I've been to Southwest a long time.

I've been in commercial uh for a long time before this job and so trends can change on you.

What's good for Southwest Airlines is we are well positioned.

So if that occurs, what do you want?

You wanna be the low cost provider, you wanna have low fares and that's the center of the Southwest business model combined with great people.

So I think we're well positioned if that does happen.

So despite those optimistic comments that we heard there from Bob Jordan, now, not necessarily a surprise, clearly, he's going to remain upbeat in conversations like that.

But even since the start of the year, we have seen a real underperformance in Southwest stock and really just getting back to the crux of this argument here from Elliott since the start of the year.

Uh Southwest shares are actually in negative territory that's compared to a nearly 30% gain in United and nearly 26% gain in Delta.

So you see that discrepancy there, the massive gap in performance.

And that's a huge reason why many of these investors are a little bit fed up with some of that performance that we've seen from Southwest.

You always get the big interview, Shana Smith.

That's why I follow you uh every single morning, Bob Jordan there with Shana Smith.

But no, for this stock to be working again.

Let's pull Elliott out of the equation.

Again, one of the most feared activist investors in all of Wall Street, this company comes knocking.

Uh You're going to have a rough few months as a leader nonetheless.

Uh they had the March 2022 and that's uh Southwest during the holiday season.

They're unable to get their Boeing planes that they need because of the many troubles over at Boeing.

They can't, they don't have premium seating.

I need premium seating.

Delta is giving me premium seating and that is starting to impact the company's results.

Also, they need to improve how people actually on board their planes.

You put all these things together.

You have a note out from Jeffries recently suggesting that Southwest May Post and this is really stunning, Shawna and a just operating loss of about 100 and $8 million this year.

The street consensus is for 600 million plus in profits.

So the street has lost complete trust.

Uh, and I think in, in the Southwest management team, uh, and you could be looking at another material earnings warning.

Keep in mind the company warned a couple months ago, really hammered the stock, but the market is, I think getting very concerned that there might be one more reset here.

Hence Elliott to the scene.