Elliott's activism has left Southwest Airlines shareholders perplexed, but they can find insight in past campaigns.

• In June, Southwest Airlines' stock decreased slightly after Elliott Management revealed its $1.9 billion stake in the company.
• The activist hedge fund has never launched a campaign at an airline, but it shares similarities with two of its previous investments at Suncor and Marathon.
• Bob Jordan and Gary Kelly are being called for removal from their positions by Elliott.

In June, when Elliott Management disclosed a $1.9 billion stake in, an initial surge in the stock soon dwindled. Instead of inciting typical jubilation on Wall Street, Elliott's strategy, detailed in a 50-page presentation, caused bewilderment and unease among investors and clients.

Over the past three decades, the hedge fund has invested in more than 140 companies, as per data from 13D Monitor, yet it has never focused on airlines.

For over four decades, Southwest, a Dallas-based airline, has maintained a distinctive culture that has thrived in a highly competitive industry.

Despite the company's declining profit margins and stock price drops in the past four years, Elliott's call for Southwest to remove CEO Bob Jordan and Chairman Gary Kelly has sparked doubts about the activist's comprehension of the airline's unique corporate culture and the slow pace of change in the aviation industry.

Elliott has not disclosed any specific changes it wants in Southwest's offerings, opting instead for a business review.

"Analysts at Melius Research stated in a report on June 10 that they are uncertain about Elliott's plans and are maintaining their Sell rating until more information is available."

On Wednesday, Southwest implemented a defensive measure by adopting a "poison pill" that would restrict Elliott's control if it acquired more than 12.5% interest in the company. Currently, Elliott holds approximately 11% of the company.

Although Southwest's latest move may present a potential wrinkle, history offers some clues as to how this will play out. Activism experts have pointed to two of Elliott's past targets for insight into the hedge fund's strategy for Southwest: in 2022 and in 2019.

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

Elliott's activist approach has propelled it to become one of the world's most successful hedge funds, with over $65 billion in assets. The firm, which relocated its headquarters from New York to West Palm Beach, Florida, in 2020, has only experienced two losing years in the past 50 years. Elliott frequently pressures companies to undergo significant transformations, such as divesting from businesses, dismissing executives, or abandoning strategic plans.

In recent years, Elliott has demonstrated its ability to work collaboratively with management. The firm has joined the boards of companies such as and . In May, CEO Haviv Ilan of said his company was open to "constructive dialogue" with Elliott, while CEO Marc Benioff of said he had "thoroughly enjoyed getting to know" the Elliott team after the firm dropped plans to nominate directors at the software company in 2023.

Southwest responded to Elliott's presentation by stating that it is "thoughtfully reviewing" the June 10 letter from the hedge fund and is eager to have "further conversations with Elliott." Additionally, Southwest expressed confidence in its strategy and team and is "focused on restoring our industry-leading financial performance." Jordan stated that he has no plans to resign.

Bobby Xu, portfolio manager and Pike, are currently leading Elliott's Southwest campaign. According to sources, Elliott and Southwest representatives had an in-person meeting in Dallas two weeks ago. However, the discussions are still in their initial stages, as stated by the sources who requested anonymity due to the confidential nature of the talks.

Another source close to the matter revealed that the airline has enlisted law firm Vinson & Elkins for advice.

Despite a 7% jump on the day of disclosure, Southwest shares have fallen 5.7% since Elliott announced its involvement, closing at $26.94 on Friday.

Southwest did not provide a comment for this story.

A sprint and Marathon

In April 2022, Elliott's stake in Suncor exposed a culture that had become overly bureaucratic, resulting in an operational slump and a series of worker deaths under CEO Mark Little.

In requesting a management review, Elliott's Pike expressed significant regard for Suncor.

Initially, investors were hesitant to comply with Elliott's requirements, specifically the sale of Suncor's Petro-Canada gas stations.

Initially, Elliott faced little resistance, but its boardroom support dissipated when another worker was killed weeks after the hedge fund announced its stake. As a result, Elliott resigned, and the Canadian company soon reached a deal with the hedge fund, granting it three board seats and agreeing to a strategic review — which could lead to a potential sale — of its Petro-Canada gas stations.

The company resolved not to sell its Petro-Canada business after the review, and appointed Rich Kruger, a longtime executive, as its new CEO.

A top job at Southwest is similarly appealing to industry executives from other airlines, according to a source familiar with the company's thinking.

Elliott's experience with Marathon demonstrated the firm's patience.

In 2016, Elliott acquired a stake in the oil producer and requested that Marathon consider splitting up the company. However, like Suncor, Marathon conducted a review and decided to remain whole, retaining its Speedway gas stations as part of the business.

In 2018, Marathon announced that it was acquiring rival Andeavor in a $23 billion deal, just a few months after reaching an agreement with Elliott.

In 2019, Elliott resumed its activist campaign after perceiving a breach of promise, gaining a 2.5% stake and declaring that it would ensure the right leadership was in place.

In the 2019 letter, Elliott's Pike stated that although the Company claimed to be conducting a comprehensive review of the Speedway business, its true intentions were different.

The board of Marathon announced that CEO Gary Heminger would retire and that the company would spin off Speedway. It was reported that Elliott pushed for an outsider to replace Heminger.

In March 2020, Marathon appointed 38-year industry veteran Mike Hennigan as CEO. Months later, in 2020, Speedway was sold to 7-Eleven's parent company for $21 billion. Following the sale, the company announced a $7.1 billion buyback program.

Despite the passage of time, Elliott continues to be among the top five shareholders at both Marathon and Suncor.

One major shareholder has expressed support for Elliott's campaign, and Southwest's bylaws allow big shareholders to call a special meeting to replace its board. However, the firm hasn't said if it plans to mount a proxy fight.

If shareholders support Elliott's plan, they will likely see their investments outperform the market, as history shows that Elliott-targeted companies tend to do. On average, Elliott holds onto its positions for two years. Elliott claims that its plan can boost Southwest's share price by 77% in just 12 months, reaching a value of $49.

The poison pill Southwest introduced this week could make things more complicated. It is typically used by companies to prevent a takeover bid. In this case, it restricts Elliott's ability to acquire more control and implies that Southwest's management is not willing to surrender.

In the press release, Kelly stated that the airline is open to any suggestions for creating long-term value, but adopting the poison pill was a necessary step for the board to fulfill its fiduciary duties to all shareholders. The plan would enable all shareholders, except for the person or group initiating the plan, to purchase stock at a 50% discount to the market price if any individual or group acquired 12.5% or more of the company's outstanding stock.

Elliott, which has previously dealt with poison pills, hasn't disclosed its campaign plans. The company isn't currently seeking any specific changes that would impact things like Southwest's baggage policy, according to a source familiar with its plans. Southwest is the only domestic airline that allows every passenger to check two bags for free, a significant advantage for families.

A refreshed board and business review could result in an examination of some of Southwest's well-liked services.

Union challenges

Since 2011, Southwest has not made any significant acquisitions and does not have any adjacent businesses to spin out.

The presence of union influence can hinder management from implementing substantial changes, especially when these changes entail layoffs and other cost-cutting measures. Over 80% of Southwest's employees are union members, with separate unions for pilots, flight attendants, and mechanics. In total, workers are represented by at least 11 unions, as per the airline's website.

In June, the 11,000-member Southwest Airlines Pilots Association met with the Elliott team in Dallas to analyze Elliott's "actionable plans and timelines," according to labor leaders.

This activist campaign has the potential to be one of the most significant events in Southwest Airlines' history, according to SWAPA leaders.

During the 2022 winter holidays, system failures on Southwest resulted in thousands of cancellations and left millions of passengers stranded. Southwest has acknowledged these issues.

Despite financial difficulties, Southwest Airlines has announced a reduction in its second-quarter revenue forecast. The company attributed this change to the challenges of adjusting its business model to the current booking trends in this rapidly changing market.

Elliott believes that the pattern justifies activist intervention, as stated in his viewpoint.

"Southwest's leadership team has been unable to adapt to the modern airline industry, as Pike and Xu stated in a statement. This is just another indication that fundamental change in leadership is necessary at Southwest."

— CNBC's Leslie Josephs contributed to this report.

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