LUV

Southwest Airlines ($LUV) Director's $60M All-In Bet: What Does He Know?

08/07/2025 20:44

Investor sentiment around Southwest Airlines ($LUV) is caught in a complex web of conflicting signals. While activist investor Elliott Investment Management continues pressing for management changes, insider actions are telling a starkly different story. The most striking move came from director Rakesh Gangwal, who purchased a massive 3.6 million shares worth approximately $60 million between September 30 and October 1, 2024. At an average price of $29.50 per share, this wasn't just an investment—it was a bold statement. Gangwal, the aviation veteran who successfully built IndiGo Airlines, clearly sees significant value in Southwest's current situation that the market is missing. Meanwhile, Elliott Investment Management sold about 1.2 million shares for $36 million in late October 2024, though it maintains roughly 10% ownership while continuing to pressure for management overhaul. Elliott has been demanding the replacement of CEO Bob Jordan and Chairman Gary Kelly, arguing that Southwest desperately needs improved profitability. Intriguingly, other directors have joined the buying spree. From March through August 2025, directors including David Hess, Pierre Breber, Gregg Saretsky, and Sarah Feinberg have consistently purchased shares. Notably, purchases continued even when the stock dropped to $23-25 levels in April, suggesting insiders view current prices as deeply undervalued. This insider confidence may not be misplaced. Southwest announced its first-ever layoffs in 54 years, cutting approximately 1,750 positions (15% of corporate staff) with cost savings targets of $300 million annually by 2026. This restructuring represents a tangible response to Elliott's pressure and signals serious commitment to operational efficiency. More significantly, Southwest is abandoning its traditional business model. After maintaining free checked bags for over 50 years, the airline began charging baggage fees in May 2025, expecting $1.5 billion in additional annual revenue. The company is also eliminating its iconic open seating policy in favor of assigned seats, marking a fundamental departure from its classic low-cost carrier approach. Financially, Southwest faces headwinds. Q2 2025 EPS of $0.43 fell 26% year-over-year and missed the $0.51 analyst consensus. Revenue declined 1.5% to $7.24 billion, while load factor of 78.5% significantly underperformed the 81.3% estimate, confirming demand weakness. However, key metrics provide reassurance. Cash reserves of $3.84 billion eliminate liquidity concerns, and operating cash flow remains positive at $1.85 billion. The forward P/E of 23.3x compares favorably to the trailing P/E of 46.4x, reflecting expectations for earnings recovery. Southwest's future success hinges on executing this business model transformation without alienating its traditional customer base while attracting premium travelers. Industry experts believe Southwest's brand strength and network position it well for this transition. From an investment perspective, the current price near $30 offers compelling value. The combination of persistent insider buying, aggressive restructuring, and business model innovation creates multiple potential catalysts for medium-term outperformance. However, investors must weigh execution risks during the transition period against broader airline industry demand concerns. The resolution of Elliott's management battle remains a key variable, but Gangwal's $60 million investment sends a powerful signal about Southwest's underlying fundamentals and transformation potential.