Vacationers wait to test in on the Southwest Airways counter at Oakland Worldwide Airport in Oakland, California, Dec. 27, 2022.David Paul Morris | Bloomberg | Getty ImagesSouthwest, a Dallas-based firm that began flying in 1971, has a singular tradition that is survived profitably for many years in a bruising {industry}.Whereas the corporate is affected by margin deterioration and has seen its inventory drop in every of the previous 4 years, Elliott’s demand that Southwest fireplace CEO Bob Jordan and oust Chairman Gary Kelly has raised questions on whether or not the activist absolutely understands Southwest’s insular tradition and the {industry}’s glacial tempo of change.Elliott hasn’t publicly specified modifications it needs inside Southwest’s choices, calling as an alternative for a enterprise evaluation.”We’re not completely certain what Elliott has in thoughts,” analysts at Melius Analysis wrote in a report on June 10, the day the agency launched its marketing campaign. “Till we all know extra, we’re sticking with our Promote score.”Southwest has taken steps to defend itself. On Wednesday, the airline adopted a so-called poison capsule that might activate if any shareholder acquired an curiosity of greater than 12.5%, limiting Elliott’s means to achieve extra management. Elliott says it at the moment has an curiosity of about 11% of the corporate.Regardless of the potential wrinkle launched by Southwest’s newest transfer, historical past gives some clues as to how this can play out. A number of activism consultants pointed to 2 of Elliott’s previous targets for perception into the hedge fund’s technique for Southwest: Suncor Power in 2022 and Marathon Petroleum in 2019.Elliott accomplice John Pike, who’s now main the Southwest marketing campaign, was concerned within the agency’s actions at each power firms. Whereas Suncor and Marathon resisted Elliott’s proposals, together with management change and enterprise critiques, Elliott nonetheless bought a lot of what it needed.Elliott’s activist follow has helped it grow to be one of the vital profitable hedge funds on this planet, surpassing $65 billion in property. The agency, which moved its headquarters in 2020 from New York to West Palm Seaside, Florida, has solely had two shedding years in 5 many years. It typically pushes firms to make dramatic modifications, resembling promoting off companies, firing executives or abandoning strategic plans.In recent times, nevertheless, Elliott has additionally proven it could actually work collaboratively with administration. Representatives have joined the boards of firms together with Pinterest and Etsy. Texas Devices CEO Haviv Ilan stated in Might that his firm was open to “constructive dialogue” with Elliott, and Salesforce CEO Marc Benioff stated he had “completely loved attending to know” the Elliott workforce after the agency dropped plans to appoint administrators on the software program firm in 2023.Southwest stated in a short response to Elliott’s presentation that it is “thoughtfully reviewing” the June 10 letter from the hedge fund and appears ahead to “additional conversations with Elliott.” Southwest additionally stated it is assured in its technique and its workforce and is “targeted on restoring our industry-leading monetary efficiency.” Jordan stated he has no plans to resign.Pike and portfolio supervisor Bobby Xu are main Elliott’s Southwest marketing campaign. Elliott and Southwest representatives met in individual in Dallas two weeks in the past, in keeping with individuals accustomed to the matter. The discussions stay within the early phases, stated the individuals, who requested to not be named as a result of the conversations had been personal.The airline has tapped Financial institution of America and regulation agency Vinson & Elkins to advise it, one other individual accustomed to the scenario stated.Southwest shares are down barely since Elliott introduced its involvement, regardless of a 7% leap on the day of the disclosure. They fell 5.7% on Friday to shut at $26.94.Southwest didn’t present a remark for this story.In April 2022, when Elliott revealed a stake in Suncor, it pointed to a tradition that had grow to be overly bureaucratic, resulting in an operational droop and a string of employee deaths beneath CEO Mark Little.”Now we have appreciable respect for Suncor,” Elliott’s Pike wrote, in calling for administration evaluation.Traders had been initially cautious of Elliott’s calls for, which included promoting off Suncor’s Petro-Canada gasoline stations.Little pushed again initially, however his boardroom help evaporated when one other employee was killed weeks after Elliott introduced its stake. Little resigned, and the Canadian firm quickly struck a take care of Elliott, providing three board seats to the hedge fund and conceding to a strategic evaluation — that means a possible sale — of its Petro-Canada gasoline stations.It was a middle-of-the-road decision. The corporate determined after the evaluation to not promote its Petro-Canada enterprise. Nevertheless it additionally introduced in as CEO an outsider, in longtime Exxon Mobil government Wealthy Kruger.At Southwest, Elliott sees a high job that might be equally interesting to {industry} executives from different airways, in keeping with an individual accustomed to the agency’s pondering.A Suncor Power facility in Sherwood Park, Alberta, Canada, Aug. 21, 2019.Candace Elliott | ReutersWhile its Suncor effort led to a comparatively fast victory, Elliott’s expertise with Marathon highlighted the agency’s willingness to be affected person.Elliott first amassed a stake within the oil producer in 2016 and requested Marathon to “consider” breaking apart the corporate. Like Suncor, Marathon ran a evaluation and opted to remain intact, protecting its Speedway gasoline stations as a part of the enterprise.However in 2018, a number of months after reaching an settlement with Elliott, Marathon introduced it was solely getting greater. The corporate agreed to purchase rival Andeavor in a $23 billion deal.Elliott responded to what it considered as a damaged promise by reviving its activist marketing campaign in 2019, selecting up a brand new 2.5% place and proclaiming that it will be certain the “proper management” was in place. “Whereas the Firm assured shareholders that it was pursuing a full evaluation of the Speedway enterprise, it had a unique agenda completely,” Elliott’s Pike wrote within the 2019 letter.Weeks later, Marathon’s board stated CEO Gary Heminger would retire and that the corporate would lastly spin off Speedway. Elliott reportedly insisted the board discover an outsider to switch Heminger.In March 2020, Marathon employed 38-year {industry} veteran Mike Hennigan as CEO. Speedway was offered to 7-Eleven’s father or mother firm for $21 billion in 2020, months after Hennigan took the publish, and the corporate later introduced a $7.1 billion buyback program.Years after its victories at Marathon and Suncor, Elliott stays a high 5 shareholder at each firms.Elliott is now one of many high traders in Southwest. One main shareholder, Artisan Companions, has expressed its help for Elliott’s marketing campaign. Southwest’s bylaws enable huge shareholders to name a particular assembly to switch its board, one thing Elliott might think about doing additional down the street, although the agency hasn’t stated if it plans to mount a proxy combat.Whether or not or not shareholders resolve to again Elliott’s push, historical past exhibits they may profit. Elliott-targeted firms are likely to outperform the market, in keeping with a 13D Monitor evaluation. The hedge fund holds on to its positions for 2 years on common, in keeping with the information. Elliott stated its plan may help Southwest’s share value leap 77% in 12 months to $49.The poison capsule Southwest launched this week might complicate issues. It is usually adopted by firms warding off a takeover bid. On this case, it limits Elliott’s means to amass extra management and likewise means that Southwest’s administration is not fascinated with rolling over.Within the press launch saying the plan, Kelly stated the airline “stays open to any concepts for lasting worth creation” however stated adopting the poison capsule was a part of the board’s “fiduciary duties to all shareholders.” The measure would enable all shareholders, “apart from the individual or group triggering” the plan, to purchase inventory at a 50% low cost to the market value if any individual or group acquired 12.5% or extra of the corporate’s excellent inventory.Elliott, which has handled poison capsules previously, hasn’t made clear the place it plans to go along with its marketing campaign. The agency is not at the moment pursuing particular modifications that might have an effect on issues resembling Southwest’s baggage coverage, in keeping with an individual accustomed to its plans. Southwest is the one home provider that enables each passenger to test two luggage free of charge, a significant buyer perk, notably for many who fly with members of the family.However a refreshed board and enterprise evaluation might result in scrutiny of a few of Southwest’s standard choices.There are some key differentiating elements for Southwest in comparison with Suncor and Marathon. For one, Southwest hasn’t made a notable acquisition since 2011 and would not have any adjoining companies to spin out.One other potential hurdle is union affect, which makes it more durable for administration to implement important modifications, notably after they contain layoffs and different price cuts. Greater than 80% of Southwest’s staff belong to a union, and there are separate organizations for pilots, flight attendants and mechanics. In all, employees are represented by at the very least 11 unions, in keeping with the airline’s web site.Management from the 11,000-member Southwest Airways Pilots Affiliation met with the Elliott workforce in Dallas in June. The group performed an “in-depth evaluation” on Elliott’s “actionable plans and timelines,” labor leaders stated in a message obtained by CNBC.”In quite simple phrases, this has the potential to be one of the vital important occasions in Southwest Airways’ historical past,” SWAPA leaders wrote of the activist marketing campaign.Southwest has beforehand acknowledged a few of the issues Elliott highlighted, together with system failures that led to hundreds of cancellations and left tens of millions of passengers stranded throughout the 2022 winter holidays.However monetary challenges persist. Final week, Southwest minimize its second-quarter income forecast. The corporate cited “complexities in adapting” its enterprise to “present reserving patterns on this dynamic surroundings.”In keeping with Elliott, it is all a part of a sample that justifies activist intervention.”Southwest is led by a workforce that has confirmed unable to adapt to the trendy airline {industry},” Pike and Xu stated in a press release. “That is one more instance that basic management change is urgently wanted at Southwest.”— CNBC’s Leslie Josephs contributed to this report.Don’t miss these insights from CNBC PRO