Insurgent Southwest shareholder Elliott Investment Management has dropped its proxy challenge.
Elliott had been pushing for a Dec. 10 proxy vote to to install its eight board nominees and take majority board control.
Instead, Elliott and Southwest have reached an agreement on a reconstituted board of directors that will keep Southwest's current leadership in control, but weakened, and preserve the job of CEO Bob Jordan, who has been an Elliott target.
Southwest chairman Gary Kelly, another Elliott target who had announced in September that he would step down next May, will now step down on Nov. 1. And Southwest has appointed six new board members effective Nov. 1, including five that were on the slate of board candidates that Elliott had put forth in its proxy challenge.
Coupled with the six directors that Southwest had already announced would step aside next month, the reconstituted board will have 13 people, leaving appointees made without Elliott's input in the majority. The newly constituted board will choose the new Southwest chairman.
In a statement, Elliott partner John Pike and portfolio manager Bobby Xu said the new directors will enhance and revitalize the board.
"We believe the strategic changes Southwest has announced since we commenced our engagement, together with the new independent directors and governance improvements, will position the company to enhance business performance, drive operational execution and evaluate additional changes to create long-term shareholder value," they said.
Kelly said he believes Southwest's best days lie ahead.
"I am confident this board will continue to hold the leadership team accountable for executing its transformational plan and delivering financial performance," he remarked.
Kelly has headed Southwest's board since 2008 and was CEO of the airline from 2004 to 2022.
The six new board appointees are former Virgin American CEO David Cush; former group president of Marriott International Dave Grissen; former administrator at the Federal Railroad Administration Sarah Feinberg; former WestJet CEO Gregg Saretsky; Patricia Watson, former chief information officer of ATM network NCR Atleos; and Pierre Breber, former Chevron CFO.
Breber is the only one among the six who wasn't on Elliott's proxy slate of board nominees.
Three of Elliott's nominees were left out of the negotiated agreement, including Robert Milton, the former Air Canada CEO who had been put forward as a chairman candidate. Former Ryanair deputy CEO Michael Cawley and Joshua Gotbaum, a former Chapter 11 trustee of Ryanair, were also cast aside.
Elliott announced its 11% stake in Southwest in June and immediately called for the ouster of Kelly and Jordan, accusing airline leadership of being slow to innovate and responsible for diminishing financial results in recent years.
The hedge fund set a Southwest share price target of $49 by next June, up from the current price of $29.
Since then, Southwest has announced a series of steps that it forecasts will produce $4 billion in incremental revenue and an operating margin of 10% by 2027.
Key initiatives include the introduction of extra-legroom seats and moving to assigned seating in the first half of 2026. Southwest also plans to enter into airline partnerships, starting with Icelandair next year, and to relaunch its vacation-package brand in mid-2025, which will be run in-house.
In addition, the airline has laid out a variety of measures to improve its cost metrics, including increased fleet utilization through the launch of red-eye flights next February and a series of steps geared toward reducing aircraft turn times.