Southwest Airlines tagged in a billionaire board member, infuriating one of its investors

The addition of Gangwal, the billionaire co-founder of InterGlobe Aviation, which controls Indian budget carrier IndiGo, is the second defensive step taken by Southwest in response to Elliott’s $1.9 billion stake. The carrier last week adopted a “poison pill” shareholder rights plan.

The latest move is part of the board’s “deliberate efforts to evolve its composition to comprise professionals with a diverse range of skills and experience in areas critical to Southwest’s business,” the airline said. It’s added eight independent directors, including Gangwal, over the past three years. His appointment to the board was effective July 7, according to a statement.

Elliott denounced the decision in a letter to Southwest’s board Monday as a “clear attempt to entrench itself and the current management team.” Feedback it’s received from institutions, individual shareholders and Southwest employees “has been overwhelmingly consistent with our perspective that the company’s performance is unacceptable and that leadership change is required,” the letter said.

The response highlights growing tension between Southwest and Elliott, which used the opportunity to also criticize the airline’s poison pill strategy as “antiquated and shareholder-unfriendly” and to renew its insistence on the ouster of Chief Executive Officer Bob Jordan and Chairman Gary Kelly, who it said have already lost shareholder trust. 

“Shareholders simply do not believe this board and management team are capable of devising and executing a bold new plan to turn around Southwest,” Elliott said. It called for the board to immediately announce a CEO transition and select an interim top executive. Without board agreement on its plan, Elliott said it would “move expeditiously to give shareholders a direct say on the necessary leadership changes.”

Southwest said in a subsequent statement that it has made “good faith efforts” to meet with Elliott to better understand its views, but the activist has focused on personal attacks and set an immediate CEO change as a condition for any serious discussions. It remains open to “constructive conversations” with Elliott, including evaluating other director candidates, Southwest said.

Southwest rose 1.5% to $27.33 at 3:24 p.m. in New York trading Monday. The stock had fallen 6.7% this year through July 5, compared with a 4.2% gain in an S&P Index of nine US carriers. 

Gangwal is no stranger to discount carriers and the US aviation industry. Best known for co-founding InterGlobe , which is credited with generating the bulk of his wealth, he also helmed US Airways from 1996 to 2001, and spent a decade at United Airlines Inc. from 1984. He was chairman, president and chief executive officer at Worldspan Technologies Inc., a travel and transportation information services and technology company, from 2003 to 2007.

Southwest’s lagging financial performance and insular culture have been focal points for criticism by Elliott, which said the airline has “written off” sources of revenue over the past 15 years that were adopted by rivals, including offering a bare bones economy fare and charging customers for checked bags and assigned or premium seats.

Elliott also earlier called for changes to Southwest’s board, including adding directors with external airline experience.

Read More: Elliott Targets Southwest CEO in $1.9 Billion Activist Push 

“Rakesh knows the importance of building a business that has both a distinct culture and enduring profitability,” Kelly said in the statement.

Under the “poison pill” adopted last week, the acquisition of at least 12.5% of the airline’s common stock would trigger the issuance of rights allowing existing investors to buy shares at a 50% discount. Such rights held by the 12.5% investor would become void, making it prohibitively expensive for Elliott to expand ownership and also diluting its stake in the carrier. Elliott has built an economic interest equal to about 11% in the carrier, but hasn’t reported its full position in securities filings, Southwest said. 

Southwest has pushed back at Elliott, saying it already had been assessing possible changes such as premium seating or revised boarding that it would unveil at a September investor meeting. But the airline had to cut its second-quarter outlook for unit revenue on June 26, saying it was struggling to adapt its revenue management system to changes in travelers’ booking habits. 

Gangwal, 70, and his family once controlled almost 37% of the Indian airline group. His decision to team up with Rahul Bhatia to create IndiGo in 2005 led to the rise of Asia’s largest budget carrier that’s now worth $20 billion, making it the third most-valuable airline in the world behind Delta Air Lines Inc. and Ryanair Holdings Plc and immediately ahead of Southwest.

Read More: IndiGo Co-Founder Resigns Ending Feud at Top Asia Budget Airline

A subsequent feud and concerns over corporate governance led Gangwal to step down from the carrier’s board and pare his stake in recent years. Gangwal is currently worth $6.4 billion, according to the Bloomberg Billionaires Index.