By Rajesh Kumar Singh, Svea Herbst-Bayliss, Shivansh Tiwary

(Reuters) -Southwest Airlines and its activist investor Elliott Investment Management ended a bitter months-long boardroom battle on Thursday in a deal that allows CEO Bob Jordan to retain his job by making bigger board-level concessions.

The agreement came as the U.S. carrier reported a surprise third-quarter profit, benefiting from improved pricing and demand, as well as rebookings from passengers stranded due to the global cyber outage in July.

Southwest's shares, however, were down 4.2% in midday trade as its revenue outlook for the fourth quarter disappointed.

As part of the deal, the Dallas-based airline will add five Elliott nominees to its board, making it the most seats the hedge fund has ever gotten in a settlement with a company in the United States. The airline previously offered to appoint up to three of Elliott's candidates.

Among other concessions, Executive Chairman Gary Kelly will accelerate his retirement to next month. Kelly previously had plans to retire in the spring after Southwest's annual meeting.

Elliott had been pushing for months to refresh the board and remove Kelly and Jordan, blaming them for the airline's poor performance. But Southwest held fast to its chief executive.

The fight between the carrier and the activist investor reached a new high last week when Elliott made good on a threat to take the battle to all shareholders by calling for a special meeting in December to let investors vote on board candidates.

"It's a very good outcome for Elliot," said Keith Gottfried, CEO of shareholder activism defense firm Gottfried Shareholder Advisory. "It reinforces their ability to get things done at large companies."

The agreement also saves Southwest from the distraction of a proxy fight, allowing it to focus on the initiatives Jordan outlined last month to turn the business around.

Gottfried said Jordan now faces the pressure to deliver on the turnaround strategy as the issue with Elliott remains "potentially unresolved, if not unresolved."

Southwest has struggled to find its footing after the pandemic, in part due to Boeing's aircraft delivery delays and industry-wide overcapacity in the domestic market.

The airline unveiled several initiatives last month to shore up sagging profits, including partnerships, vacation packages for customers and aircraft sale leasebacks. It will add seats with more leg room and drop its marquee open seating system in a bid to grow high-margin revenue.