Southwest Airlines (NYSE:LUV) has fallen behind its competitors in 2024, leading to significant activist

Shares of the airline jumped 7% at Monday’s opening after Elliott Investment Management revealed a $1.9 billion investment in the company.

Southwest has faced difficulties recently. Its shares were flat for the year leading up to Monday’s trading, in contrast to the 28% and 25% gains 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 impacted by issues at Boeing, which have limited the availability of new 737s for its fleet.

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

According to Elliott, Southwest’s adherence to an outdated approach has restricted returns and led to problems such as the operational breakdown in December 2022.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.

Despite its strong 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 attractive target for activist intervention. Elliott aims to revamp 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Southwest’s pricing model also appears outdated compared to competitors who have refined cabin segmentation between basic economy and premium seating.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 accelerate the decision-making process, but investors should recognize that there’s no quick fix for revitalizing Southwest’s performance.