• Southwest Airlines and activist investor Elliott Investment Management said Thursday they've struck a settlement that averts a proxy fight.
• The deal includes the appointment of six directors to the airline's board and the earlier retirement of Executive Chairman Gary Kelly.
• Southwest CEO Bob Jordan will keep his job.

Southwest Airlines and activist hedge fund Elliott Investment Management struck a deal to avert a proxy fight in exchange for naming six directors to the airline's board — short of board control — and an earlier retirement for Executive Chairman Gary Kelly. Southwest CEO Bob Jordan will keep his job as part of the deal.

"We are pleased to have come to an agreement with Southwest on the addition of six new directors that will enhance and revitalize its Board," Elliott's John Pike and Bobby Xu said in a statement Thursday.

Five of Elliott's board nominees along with former Chevron CFO Pierre Breber will join the board, which will stand at 13 members, Southwest said.

The Southwest board will appoint a new chairman to replace Kelly, who will now step down next month instead of next year.

Elliott had called for both Kelly and Jordan's ouster and criticized the airline's leadership for not moving fast enough on sales- and profit-boosting strategies. The airline has made few changes to its business model in its 50 years of flying and is now planning to upend its long-standing policies like open seating and a single-class cabin for premium seats that more profitable carriers like Delta Air Lines offer.

Southwest's shares are up less than 1% this year while the S&P 500 has risen 21%. The airline's third-quarter profit, also announced Thursday, topped analysts' estimates. Shares in the carrier were down roughly 6% in midday trading.

The Dallas-based carrier has been slashing unprofitable routes to cut costs. At an investor day last month, it said the new revenue initiatives and other changes put it on track to boost earnings before interest and taxes in 2027 by $4 billion. The airline also authorized a $2.5 billion buyback, the first $250 million of which was announced Thursday. 

Elliott and Southwest as recently as last week had been girding for a proxy fight. The activist called for a special meeting in December to vote on its slate of board nominees, which it had trimmed from 10 to eight.

Elliott's campaign hinged in large part on the removal of Kelly and Jordan from their leadership positions.

With eight new directors joining as a result of the settlement and of Southwest's earlier board refreshment, the deal is the largest board change Elliott has driven in a U.S. fight.

Southwest's board said in September it would drop from 15 directors to 12. Thursday's announcement notches the board back up to 13 members.

Also in September, Southwest said Kelly would step down next spring, but the airline's board had staunchly backed Jordan. Both Kelly and Jordan have worked at Southwest for more than three decades.

"I believe Southwest's best days lie ahead under the vision and leadership of Bob Jordan and the oversight of this reconstituted Board," Kelly said in a release Thursday.

— CNBC's Leslie Josephs contributed to this report.

Correction: This story has been corrected to remove an inaccurate description for Pierre Breber, who will be joining Southwest's board. Southwest previously announced its board would drop from 15 directors to 12. An earlier version of this story misstated that announcement.