Time to cash out!

A story about Southwest Airlines and an activist investor that got what it wanted.

“Employees come first,” Southwest Airlines co-founder Herb Kelleher once famously explained. His theory went like this:

1. If you treat employees well, they’ll treat customers well.

2. If customers are treated well, they’ll keep coming back.

3. If customers keep coming back, shareholders will be rewarded.

For decades, Southwest built an entire business model around that idea.

However, there was always one problem: Southwest is a public company. In public companies, executives have a fiduciary duty to the corporation and its shareholders—not so much to employees and customers.

So leaders can legitimately believe that prioritizing employees will produce the best long-term results, and Kelleher’s track record suggested it often did. However, the market doesn’t always reward patience.

If performance lags, someone else can show up and demand change. For the past two years, that “someone else” at Southwest Airlines has been an activist investor called Elliott Investment Management.

A lot of big changes

Elliott accumulated a large stake in Southwest in 2024 and began pushing aggressively for changes, criticizing the airline for stagnant performance, calling for leadership shifts, and pressing for a more traditional, profit-focused strategy.

Southwest struck a truce to avoid a proxy fight, agreeing to appoint multiple new directors backed by Elliott and to accelerate leadership changes at the board level.

What followed was the most dramatic transformation in the airline’s history:

• Assigned seating replaced open seating starting last month.

• New premium options and fare structures emerged, while fees that had long been unthinkable became reality.

• Layoffs—once unheard of—arrived and cultural traditions were cut back.

• The airline expanded distribution into third-party booking channels and leaned harder into revenue optimization.

Some of these changes had been discussed internally for years. But there’s no question that Elliott accelerated everything.

The inevitable happens

Now comes the most revealing, and perhaps inevitable development: Elliott is starting to step back.

Filings show the firm sold millions of Southwest shares between mid-December and late January, reducing its stake to about 9 percent, down from a peak of around 16 percent.

The transactions were described as portfolio management moves, and Elliott said it still sees upside.

However, the timing is notable. Southwest’s stock had been climbing, reaching levels not seen in years following strong earnings and optimistic profit projections.

At the same time, Elliott-backed directors are stepping down from the board, and the company plans to shrink the board’s size.

This is what activists do when they believe they’ve unlocked value.They push for change. The company cuts costs, raises prices, alters its model, and chases efficiency. The stock moves. Then, at least to some degree, they take profits and move on.

What gets left behind

By many measures, Southwest today is a more conventional airline than it was just a few years ago. The distinctive quirks and customer-friendly policies that built intense loyalty have been pared back.

Even internally, the shift from an employee-first philosophy toward a more investor-driven structure has been unmistakable.

Perhaps more tellingly, customers haven’t revolted. That may be the biggest shift of all.

Travelers have spent decades watching beloved brands slowly strip away perks, introduce fees, and optimize every inch of the experience for revenue. At some point, people stop being shocked.

Companies follow the incentives, which brings things back to Kelleher’s philosophy. This is why it was always difficult to preserve inside a public corporation over the long term.

CEO Bob Jordan said last year that the airline wasn’t seeing meaningful evidence that travelers were abandoning Southwest over the changes.

Putting employees first can be a brilliant strategy. It can even be the most effective way to create value.

But, if financial performance slips, activist investors don’t need to be villains. They just need to be persuasive to other shareholders.

If you’re a shareholder, an employee, or a customer, there’s a lesson here.

You don’t have to like what happens.

Then again, you can invest in it.

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Other things:

• The “Epstein files” released by the Justice Department failed to include FBI memos related to a woman who accused President Trump in 2019 of having sexually abused her decades earlier, when she was a minor. The existance of the memos was revealed in an index, according to which the FBI conducted four interviews and wrote summaries about each one. But only one of the summaries, which describes her accusations against Mr. Epstein, was released. The other three are missing. It is unclear why. (The New York Times, gift link)

• Trump awarded the Medal of Honor to two pilots during the State of the Union: Army Chief Warrant Officer 5 Eric Slover, who was wounded while flying a helicopter during January’s mission that resulted in the capture of Venezuelan President Nicolás Maduro; and retired Navy Capt. Royce Williams, who shot down four Soviet jet fighters during the Korean War. Capt. William’s mission had been classified top secret for decades. (Task & Purpose)

• Vice President JD Vance announced Wednesday that the Trump administration will temporarily halt Medicaid funding to the state of Minnesota, after President Donald Trump railed against alleged fraud in the Gopher State Tuesday evening in his SOTU address. “A lot of people are getting rich off the generosity of American taxpayers,” Vance said, in announcing the decision two withhold $259 million. (Fox News)

• Aefugee from Myanmar missing since his release from jail into the custody of U.S. Border Patrol was found dead by Buffalo police officers late Tuesday, authorities reported. Border Patrol agents are accused of dropping off Nurul Amin Shah Alam, who is mostly blind and unable to communicate in English, at a Tim Hortons restaurant last Thursday without informing anyone they had done so. His body was found five days later and about 4 miles from the restaurant. Buffalo police homicide detectives are investigating. (Buffalo News)

• Cuban soldiers killed four people and wounded six aboard a Florida-registered speed boat that had entered Cuban waters and opened fire on the soldiers first, the Cuban government said. U.S. Secretary of State Marco Rubio told reporters that he was made aware of the incident and that the U.S. is now gathering its own information to determine if the victims were American citizens or permanent residents. (AP)

• You might remember that back in January NASA conducted the first-ever medical evacuation from the International Space Station. At the time the agency kept the astronaut’s identity private for HIPAA reasons, but yesterday he revealed himself: Astronaut Mike Fincke, age 58. “Thanks to their quick response and the guidance of our NASA flight surgeons, my status quickly stabilized,” Fincke said. (NBC News)

• After The Washington Post’s retreat from local news and sports—in the “DMV,” one of the country’s largest and wealthiest media markets, home to some 6 million residents—rival outlets are racing to fill the void, scooping up displaced talent and capitalizing on the opportunity. (Status News)

Thanks for reading. Photo by Forsaken Films on Unsplash. I wrote about some of this before at Inc.com. See you in the comments.