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Southwest Airlines (LUV) has seen its margins and profits get squeezed over the past several quarters, resulting in a 24% yr/yr drop in its stock price, and now the company is facing even more turbulence as activist investor Elliott Management launches a proxy fight. LUV's underperformance has made it a target for a firm like Elliott, which plans to nominate ten independent candidates for LUV's Board of Directors.

• Among those nominees are David Cush, the former CEO of Virgin America, Michael Cawley, the former deputy CEO and CFO of Ryanair, and Sarah Feinberg, a former senior official at the Department of Transportation. While LUV already held its Annual Shareholder Meeting on May 15, Elliott is expected to call a special meeting that would allow shareholders to vote on the new candidates, according to the Wall Street Journal.
• Elliott, which has amassed an 11% stake in LUV through its various funds, has also expressed its desire to replace CEO Bob Jordan and former CEO Gary Kelly, who now serves as Executive Chairman.
  • For their part, Mr. Jordan, Mr. Kelly, and LUV's executive team, have put a plan together to try to turn the airline's fortunes around. A major component of that plan includes its decision to end its long-standing open seating policy, opting to go with the more industry-standard assigned seating instead.
  • Also, LUV will be adding some red-eye flights to its schedule in an effort to boost its profits.
• On that note, LUV's margins and profits have badly lagged its competitors. In Q2, its adjusted operating margin was just 5.5%, compared to 14.7% for Delta Air Lines (DAL) and 13.1% for United Airlines (UAL).
  • While rising capacity throughout the industry has put pressure on airfare prices and margins for every airline, LUV has been unable to mitigate that headwind through premium services or an international business.
  • In contrast, DAL and UAL have benefitted from a more affluent customer base that's willing to pay up for first class seats, and from the strength in international travel demand.

At this point, it's unclear what exact strategy changes would be implemented should Elliott win this proxy fight, enabling the firm to replace ten of LUV's fifteen board members. Some of LUV's struggles are out of its control, too, including Boeing's (BA) ongoing production and delivery delays with the 737 MAX. Given the stock's poor performance, though, LUV's shareholders may be ready for a major shakeup. In any event, the next few months figure to be a bumpy ride for LUV and its leadership team.