Southwest Airlines' stock experienced a notable surge of approximately 7% in premarket trading on Monday following a report by The Wall Street Journal revealing that activist investor Elliott Investment Management has acquired a nearly $2 billion stake in the airline. This move positions Elliott as one of Southwest's largest shareholders and signals potential significant changes aimed at addressing the carrier's recent underperformance.

Elliott Investment Management, a renowned activist investor, is known for pushing for strategic changes in companies to enhance shareholder value. According to sources cited by The Wall Street Journal, Elliott plans to engage directly with Southwest's management team to advocate for reforms that could potentially reverse the airline's struggles. Both Southwest and Elliott have yet to respond to requests for comment on the matter.

Southwest, headquartered in Dallas, Texas, is one of the largest airlines in the United States. However, the company has faced a series of challenges recently, including higher operational costs and slower-than-anticipated revenue growth. A significant factor contributing to these issues has been delays in the delivery of Boeing 737 MAX aircraft, which have left Southwest overstaffed and forced to scale back its growth plans.

The airline's shares have dropped nearly 4% this year, contrasting with a roughly 12% rise in the S&P 500 index. Despite these setbacks, analysts see potential in the company's strong market position. "We are not surprised by the activist interest in Southwest given the very strong franchise with valuable tangible and intangible assets," noted Raymond James analyst Savanthi Syth in a research note.

Elliott's track record with other companies, such as Crown Castle, NRG Energy, and Goodyear Tire & Rubber, often involves pushing for significant leadership changes, including CEO replacements. This approach has historically been aimed at revitalizing companies and improving their financial performance. Given Southwest's recent history, including a disastrous holiday season in 2022 that resulted in significant losses and reputational damage, such interventions may be on the horizon.

Since CEO Bob Jordan took over three years ago, Southwest has encountered mounting losses and several public relations issues. The 2022 holiday meltdown alone led to a $140 million federal settlement, in addition to over $1.1 billion in losses from refunds, reimbursements, and lost ticket sales. More recently, the airline reported a $231 million loss for the first quarter of 2024 and announced measures to limit hiring and cut services to four airports.

Further compounding Southwest's difficulties are production delays at Boeing, which has slowed down the delivery of new airplanes due to quality control issues. Southwest initially expected to receive 46 new Boeing 737 MAX 8 jets this year but now anticipates only 20, while planning to retire 35 older aircraft. These delays have significantly disrupted the airline's capacity planning and growth strategy.

Despite these operational challenges, the broader airline sector remains optimistic, buoyed by strong demand for summer travel. This optimism is reflected in Southwest's trading multiples, with shares trading at about 19.52 times their forward profit estimates, compared to United Airlines' 4.74 and the industry average of 7.19.