Southwest Airlines Co. has appointed industry veteran Rakesh Gangwal to its board of directors, in search of to strengthen the airline’s leadership position after activist investor Elliott Investment Management called for sweeping changes.
The hiring of Gangwal, the billionaire co-founder of InterGlobe Aviation, which controls India’s low-cost carrier IndiGo, is the second defensive move Southwest has made in response to Elliott’s $1.9 billion investment. The airline last week passed a “Poison pill” Shareholder Rights Plan.
The latest move is an element of the board’s “targeted efforts to transform its composition to include professionals with a broad range of skills and experience in areas critical to Southwest’s business,” the airline said. Over the past three years, eight independent directors have been added, including Gangwal. His appointment to the board took effect on July 7, it said in an announcement.
Elliott condemned the choice in a letter to Southwest’s board on Monday as a “clear attempt to entrench himself and the current management team.” Feedback from institutions, individual shareholders and Southwest employees “overwhelmingly agreed with our view that the company’s performance is unacceptable and a change in leadership is needed,” the letter said.
The response underscores the growing tensions between Southwest and Elliott. Elliott also used the chance to criticize the airline’s poison pill strategy as “outdated and shareholder-unfriendly” and to reiterate his insistence on the removal of CEO Bob Jordan and Chairman Gary Kelly, who Elliott said had already lost shareholder confidence.
“Shareholders simply do not believe that this board and this management team are capable of developing and implementing a bold new plan to turn Southwest around,” Elliott said. The board has been asked to instantly announce a CEO change and appoint an interim executive. Without board approval of this plan, the corporate will “move expeditiously to give shareholders a direct say in the necessary leadership changes,” Elliott said.
Southwest said in a subsequent statement that it had “made a good faith effort” to satisfy with Elliott to raised understand his views, however the activist focused on personal attacks and made a right away CEO change a condition for serious talks. Southwest stays open to “constructive discussions” with Elliott, including evaluating other board candidates, the corporate said.
Southwest rose 1.5 percent to $27.33 in New York trading on Monday (as of three:24 p.m.). As of July 5, the stock had fallen 6.7 percent this 12 months, while the S&P index of nine U.S. airlines rose 4.2 percent.
Gangwal isn’t any stranger to low-cost carriers and the U.S. airline industry. He is best generally known as the co-founder of InterGlobe, from which he owes most of his wealth. He also headed US Airways from 1996 to 2001 and spent 10 years at United Airlines Inc. from 1984. From 2003 to 2007, he was chairman, president and CEO of Worldspan Technologies Inc., a travel and transportation information services and technology company.
Elliott was particularly critical of Southwest’s weak financial position and siloed corporate culture. Over the past 15 years, the airline has “written off” revenue sources which have been taken over by competitors, including offering a stripped-down economy fare and charging for checked baggage and assigned or premium seating.
Elliott had previously also called for changes to Southwest’s board of directors, including adding directors with experience at outside airlines.
Read more: Elliott targets Southwest CEO and plans to spend $1.9 billion on activists
“Rakesh understands the importance of building a company that has both a strong culture and sustained profitability,” Kelly said within the statement.
Under the “poison pill” approved last week, acquiring not less than 12.5 percent of the airline’s common stock would trigger the issuance of rights that will allow existing investors to buy shares at a 50 percent discount. Any such rights held by the 12.5 percent investor could be voided, making it prohibitively expensive for Elliott to expand his ownership and in addition diluting his stake within the airline. Elliott has built up a roughly 11 percent economic interest within the airline but has not disclosed his full position in securities filings, Southwest said.
Southwest has rebuffed Elliott, saying it has already explored possible changes reminiscent of premium seating or revised boarding, which it is going to present at an investor meeting in September. But the airline needed to cut flights within the second quarter. outlook for unit sales on June 26, saying it was struggling to adapt its revenue management system to changes in travelers’ booking behavior.
Gangwal, 70, and his family once controlled nearly 37 percent of the Indian airline. His decision to affix forces with Rahul Bhatia to form IndiGo in 2005 led to the rise of Asia’s largest low-cost carrier, which is now price $20 billion, making it the world’s third most respected airline behind Delta Air Lines Inc. and Ryanair Holdings Plc and just ahead of Southwest.
Read more: IndiGo co-founder resigns, ending dispute at Asia’s largest low-cost airline
An ensuing dispute and concerns about corporate governance led to Gangwal resigning from the airline’s board and parry his share lately. According to the Bloomberg Billionaires Index, Gangwal is currently price $6.4 billion.
