May 15, 2026

The airline industry’s first-quarter 2026 earnings have shown a clear split between strong revenue demand and significant margin pressure, with most carriers reporting sales growth but reduced profitability due to surging fuel costs. Across major U.S. airlines, revenues rose double digits in many cases, supported by resilient leisure and corporate travel demand and improving pricing power. However, a sharp spike in jet fuel — driven by geopolitical disruptions — added hundreds of millions of incremental costs per airline, which has forced carriers to cut capacity, raise fares, and in several cases, reduce or withdraw full-year guidance. Southwest delivered a profitable quarter, meeting its own first quarter guidance but has also withdrawn full-year guidance due to the economic uncertainty surrounding high fuel prices.

Revenue/Network/Operational

First-quarter results for Southwest Airlines showed strong revenue momentum driven by both demand and product changes, even in a volatile macro environment. Unit revenue (RASM) increased 11.2% year over year, exceeding guidance, while operating revenue reached a record $7.2 billion for first quarter. CEO Bob Jordan emphasized that this performance was not just demand recovery, but a structural shift in how revenue is generated. A key driver has been the rollout of new commercial initiatives, including assigned seating/legroom and increased ancillary revenue (bags, seat selection, etc.) The Company reported strong upsell performance (buy-up rates increased from approximately 20% to approximately 60%) and corporate revenue was up 16% in the first quarter. March alone saw corporate revenue jump 25%. Rapid Rewards engagement and loyalty metrics increased significantly as well.

Operationally, the Company continues to prioritize reliability and efficiency, with management highlighting industry-leading on-time performance during major product rollouts. The Company is at or near the top in most operational metrics currently.

From a network standpoint, the strategy is increasingly margin-focused rather than volume-focused. The Company discussed the exit of underperforming markets (ORD and IAD) while redeploying into stronger markets like BNA, MCO, and SAN. Additionally, capacity growth has been trimmed to approximately 2%. Management made it clear that RASM — not load factor or market share — is the primary target, reinforcing a shift away from traditional Southwest growth philosophy toward yield optimization.

Expenses/Costs

Cost performance in the first quarter reflects a combination of strong internal discipline and significant external pressure — primarily from fuel. Southwest reported CASM-ex was up 2.3% year over year, better than expected, and emphasized that these improvements were structural, not temporary. Some of the drivers cited by CFO Tom Doxey: improved operational efficiency, better technology utilization, ongoing fleet transition, and better productivity. Maintenance costs improved through fleet modernization as well.

Fuel was the dominant cost headwind of the quarter, with the actual fuel price at $2.73 per gallon versus a $2.40 forecast. The incremental cost impact was roughly $164 million in the first quarter, which equated to a $0.22 headwind to Earnings Per Share (EPS). The Company is expecting a $1 billion fuel headwind in the second quarter assuming oil prices were to remain at current levels. Unlike prior cycles, Southwest is largely unhedged, so fuel volatility will directly affect earnings and pricing of fares has become the primary offset.

Fleet/Liquidity/Capital Deployment

The Company continues its transition away from the -700 to MAX aircraft, with the acceptance of 10 MAX-8 aircraft and the retirement of 13 aircraft during the quarter, ending flat at 800 aircraft. The plan still calls for 66 MAX-8 aircraft deliveries and to retire approximately 60 aircraft in 2026. There are reports that suggest the MAX-7 could be certified and ready to accept later this year. Aircraft sales continue (three -700s and two -800s during the first quarter) but are not a major earnings driver.

Southwest remains in a strong financial position with $4.8 billion in liquidity, a 2.2X leverage ratio, and an investment-grade balance sheet. The Company raised $500 million in secured financing to retire higher-cost government debt and continues to emphasize balance sheet strength as a competitive advantage. The Company has unencumbered aircraft and other assets with a net book value of $16.5 billion and expects 2026 net capital spending in the range of $3.0 billion to $3.5 billion.

The Company considers capital allocation as a balance between shareholder returns and financial discipline. Southwest repurchased $1.25 billion in shares and paid $93 million in dividends. Approximately $450 million remains outstanding under the Company’s $2.0 billion repurchase authorization. Mr. Doxey noted that all decisions are made within “strict guardrails” to preserve investment-grade credit ratings, liquidity targets, and flexibility in a volatile environment.

Looking Ahead to Second Quarter 2026

The outlook for the second quarter looks to be defined by strong revenue momentum offset by significant fuel uncertainty. The Company is forecasting RASM growth of 16.5% to 18.5%, which is industry-leading at present, with strong yields and pricing along with continued benefits from product initiatives and upsell. CASM-ex is expected to rise modestly, with fuel remaining as the biggest variable and risk factor. There will be a continued emphasis on cost control and efficiency. Second quarter capacity growth has been reduced to 0.5% with close-in demand shaping and network adjustments. The Company stated they will remain “aggressive and dynamic” in adjusting capacity as necessary to maintain profitability. We are hopeful that the Company can maintain this strong revenue momentum amid the structural changes to the business model and energy price fluctuations throughout 2026.

SWAPA Scorecard

SWAPA tracks major airlines on the SWAPA Scorecard which is presented below with data from first quarter 2026. All airlines were affected by the spike in fuel prices, but certain airlines were better able to offset the rise in fuel costs with increased revenue from higher ticket prices. Higher costs from capacity cuts, among other items, continue to pressure airlines as well.

Glossary of Terms

Aircraft Stage Length — Represents the average miles flown per aircraft departure

ASMs — Available seat miles, or "capacity"; represents total seats available across the fleet multiplied by the number of miles flown

CASM — Operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASM-ex — Operating costs excluding fuel, special items, and profit sharing per ASM. This metric is used to help compare airlines to one another by comparing their efficiency based on the size of their fleet and their miles flown. We use CASM-ex to generally mean operating costs excluding fuel, special items, and profit sharing.

Diluted Earnings per Share — Represents earnings per share (EPS) using shares outstanding plus any unexercised stock options or stock awards that have been granted to management or the board of directors.

Diluted Shares — Represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel — Best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

EBITDA — Earnings before Interest, Tax, Depreciation, Amortization.

Free Cash Flow — Total operating cash flow generated less cash paid for capital expenditures (SWAPA defined). SWA defines it as total operating cash flow generated less cash paid for capital expenditures, less construction for others plus reimbursement for others.

Gross Leverage Ratio — A financial metric measuring a company’s total debt relative to its earnings (EBITDA). Generally, it is calculated as Total Debt/EBITDA, indicating how long it would take a company to pay back its debt.

Load Factor — RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

RASM — Operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile

RPMs — Revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield — Passenger revenue per RPM; represents the average revenue for flying one passenger one mile.

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