Southwest Airlines Stock Soars on Activist Investment

Luv Stock

Southwest Airlines (NYSE:LUV) has lagged behind its competitors in 2024, prompting significant activist interest.

Shares of the airline surged 7% at Monday’s opening after Elliott Investment Management disclosed a $1.9 billion stake in the company.

Facing Headwinds Southwest has encountered challenges recently. Its shares were stagnant for the year leading up to Monday’s trading, in contrast to the 28% and 25% increases seen at United Airlines Holdings and Delta Air Lines, respectively.

The airline’s route network is perceived as less efficient than its rivals, and it lags in fee income. Additionally, Southwest has been affected by issues at Boeing, which have restricted the availability of new 737s for its fleet.

Activist Intervention Elliott, the prominent activist, has taken notice. In a letter to the board, it criticized Southwest’s poor execution and the leadership’s reluctance to adapt its strategy, resulting in disappointing outcomes for shareholders, employees, and customers alike.

According to Elliott, Southwest’s adherence to an outdated approach has constrained returns and led to problems such as the operational breakdown in December 2022. Elliott believes that with the right strategy, the stock could reach $49 per share within 12 months, implying a 77% return compared to its value at the time of the letter.

Assessing Southwest’s Prospects Despite its reputable brand, Southwest’s stock performance trails Delta not only for the year but also over the past five- and 10-year periods. The company has outgrown its agile beginnings, while its competitors have become more adept at competitive strategies.

Given these circumstances, Southwest presents an appealing target for activist intervention. Elliott aims to overhaul the board and management, potentially advocating for the reversal of passenger-friendly features like free bags and open seating.

Southwest’s pricing model also appears outdated compared to competitors who have refined cabin segmentation between basic economy and premium seating.

Southwest faces tough decisions ahead. Elliott’s involvement may expedite the decision-making process, but investors should recognize that there’s no quick fix for revitalizing Southwest’s performance.

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