Southwest board agrees to step down, hedge fund appointees to step in

DALLAS, Texas: Southwest Airlines has settled a months-long proxy battle with hedge fund Elliott Investment Management by agreeing to overhaul its board of directors.

The settlement, announced last week, will see Chairman Gary Kelly and six other current board members step down on November 1 to be replaced by five Elliott-backed candidates and a former Chevron executive.

Elliott, led by billionaire financier Paul Singer, had been pressuring Southwest to increase its profits and improve its stock performance. While the hedge fund didn't achieve its goal of securing majority control of the board, it gained significant influence and agreed to end its push to oust CEO Robert Jordan.

The settlement also canceled a special shareholder meeting that had been scheduled for December to elect new directors.

Southwest's CEO, Robert Jordan, expressed optimism about the new board members. 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," Jordan said on CNBC.

In the midst of the boardroom drama, Southwest also reported a sharp drop in third-quarter profits, which fell nearly two-thirds to US$67 million, due to rising labor and other costs. The airline's revenue rose 5 percent to $6.87 billion, surpassing analyst expectations, but labor expenses increased by more than 12 percent, largely due to new labor agreements.

Meanwhile, American Airlines also posted disappointing financial results for the third quarter, with a $149 million loss. The loss was primarily due to bonuses paid to flight attendants after the ratification of a new labor contract. Excluding one-time items, American reported adjusted earnings of 30 cents per share, beating Wall Street expectations.

Both Southwest and American Airlines are feeling the effects of fierce competition in the domestic market, which has resulted in lower prices for economy-class tickets. However, industry insiders suggest that the glut of available seats may be easing as airlines cut back on flights for the rest of the year.

Southwest announced plans to reduce its flight capacity by four percent in the fourth quarter compared to the same period last year. Spirit Airlines, another budget carrier, has made even more significant cuts.

Despite the turbulence, Southwest's stock fell just three percent, while shares of American Airlines remained flat during October 24's trading.