Southwest shares fall 3% as activists push out chairman Gary Kelly

Famous activist investor Elliot Management cited a floundering stock price as its main evidence that Southwest Airlines chairman Gary Kelly needed to go. The airline’s shares dropped 3% Tuesday, however, after Southwest said he would retire next year as part of a revamp of the company’s board. The announcement came a day after Kelly and two other board members met with the hedge fund.

Elliot announced in June that it had built a 11% stake in the airline and called for the departures of Kelly and CEO Bob Jordan, as well as an overhaul of Southwest’s distinct business model. On Tuesday, Southwest’s stock was currently below the $29 mark, down over 50% from its post-pandemic high in April 2021 and more than 10% below where it sat a decade ago. It's worth noting, however, that Southwest shares have outperformed the industry's index during that span.

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While Kelly, who served as the airline’s chief executive from 2004-22, is leaving, he said Jordan will remain as CEO. Six directors, however, will voluntarily step down from the board in November. Four new board members will be appointed in the near term, Kelly wrote, three of which could be filled by candidates put forward by Elliot.

“I had intended to consider this next year as part of our continuing efforts to refresh the Board,” he said in the announcement, “but I’ve since decided it is more important to expedite the plan in an effort to put this governance debate behind us and allow Bob and his team to focus exclusively on running the airline and restoring our industry leading performance.”

Southwest earned a loyal customer base by not charging for things like checked bags or changes to reservations. The airline’s famous open seating policy, which helped Southwest turn planes around faster than the competition, however, has recently lost its luster with consumers.

With rivals earning most of their revenue from premium-seating options, Southwest announced in July that it would begin offering assigned seats. Elliot wants the airline to go further, believing it should resemble ultra-low-cost carriers like Spirit and Frontier.

“We learned yesterday, which was made public today, that nearly half of Southwest's Board of Directors had decided to resign based on shareholder feedback,” Elliot partner John Pike and portfolio manager Bobby Xu said in a statement. “In our experience, this is unprecedented.”

“The need for thoughtful, deliberate change at Southwest remains urgent,” the statement added, “and we believe the highly qualified nominees we have put forward are the right people to steady the Board and chart a new course for the airline.”

Some analysts worry major changes at Southwest will damage its distinct value proposition and widely beloved brand. Last month, Fortune’s Geoff Colvin noted that the airline’s long-celebrated culture had not been mentioned in the company’s most recent earnings calls, nor Elliot’s deck of 51 slides advocating for a leadership shakeup.

It may be telling, therefore, that Kelly spelled culture and customers with a capital “C” on the final page of his message to shareholders.

“We have a strong brand, are famous for our passionate, friendly Customer Service, and as a result, have devoted fans and loyal Customers,” Kelly wrote. “No future management team or Board must ever squander our Culture or our passion for Customer Service.”

He said the airline will share an updated business plan at its Sept. 26 investor day in Dallas.

This story was originally featured on Fortune.com