Southwest settles proxy fight with hedge fund and reports smaller Q3 profit. American loses money
DALLAS - Southwest Airlines reached a settlement with an activist investor by agreeing to overhaul its board, ending — at least for now — a monthslong fight with Elliott Investment Management, which is pressuring the airline to boost profits and the stock price.
Southwest said Thursday that Chairman Gary Kelly and six current board members will depart Nov. 1 and be replaced by five Elliott-backed candidates and a former Chevron executive.
Elliott, the hedge fund led by billionaire financier Paul Singer, achieved most of the demands it has made since June, but it settled for less than majority control of the Southwest board. However, it did not succeed in ousting CEO Robert Jordan.
A special shareholder meeting to elect directors in December will be canceled.
Southwest announced the shakeup as it reported that its third-quarter profit fell by nearly two-thirds, to $67 million, on higher costs for labor and other expenses.
FILE - Ronkonkoma, N.Y.: A Southwest Airlines flight takes off at Long Island MacArthur Airport in Ronkonkoma, New York on March 25, 2021. (Photo by Steve Pfost/Newsday RM via Getty Images)
Meanwhile, American Airlines posted a loss of third-quarter loss of $149 million, weighed down by paying bonuses to flight attendants who ratified a new labor contract.
The earnings reports were overshadowed by the drama between Southwest and Elliott, which at one point campaigned for 10 seats on the Southwest board. That would have been enough to fire Jordan, the embattled CEO.
The settlement saves Jordan's job but leaves him on the hot seat to improve the airline's financial performance.
Jordan, who had taken an increasingly combative tone against Elliott lately, sounded conciliatory on Thursday.
"While our financial results are demonstrating improvement, I recognize that we still have a lot of work to do to fulfill our commitment to return to prosperity," he said.
The board members joining from Elliott, including former Virgin America CEO David Cush and former WestJet CEO Gregg Saretsky, "bring unique and different airline experience to our board (that) will be helpful as we execute our plan and as we look to the longer future," he said on CNBC.
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Jordan said he welcomed a board that would "hold management accountable, hold me accountable to produce the results" that Southwest leaders promised at an investor day last month.
Southwest plans to increase revenue by converting nearly one-third of its seats to premium ones with extra legroom. It will also begin assigning seats, ending the longtime practice of letting passengers pick their own seats after boarding the plane. It is also pursuing partnerships with international airlines, starting with Icelandair, to offer destinations beyond North America and Central America.
The third-quarter results from Southwest and American reflected intense competition on domestic routes, particularly from budget carriers, that created a glut of seats and forced airlines to cut prices on many economy-class tickets. Airline industry officials say that has begun to change as airlines reduce their schedules for the rest of the year.
Southwest said it planned to fly 4% less in the fourth quarter than it did in the same quarter last year. Spirit Airlines has made even bigger cuts.
Both American and Southwest said that excluding special items, their results beat Wall Street expectations.
American said that excluding one-time items, mostly a $516 million charge tied to a new contract with union flight attendants, it would have earned 30 cents per share. Analysts were expecting adjusted earnings of 16 cents per share, according to a FactSet survey.
American CEO Robert Isom says the airline is focusing on improving business travel to boost revenue over the next year.
"As we take a look at going forward, we're very focused on making sure our network appeals to customers from a leisure basis, international certainly from a business perspective," he said.
American was also fined $50 million by the U.S. Department of Transportation for its mishandling of thousands of wheelchairs and scooters and persons with disabilities. The airline says it’s taken major steps to remedy the situation.
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Revenue at Fort Worth-based American rose 1%, to $13.65 billion, about $150 million more than analysts expected.
Dallas-based Southwest said third-quarter profit, excluding special items, works out to 15 cents per share, which beat a forecast of six cents per share among analysts surveyed by FactSet.
Southwest also said it would speed up the repurchase of $250 million worth of its stock, under a $2.5 billion share-buyback plan it announced last month.
Southwest Airlines Co. shares fell more than 4% while American Airlines Group Inc. gained less than 1% in morning trading Thursday.