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Southwest Airlines Q3 2026 Earnings Analysis

Southwest Airlines Q3 2026 Earnings Analysis

October 29, 2026

Industry Overview

Southwest Airlines reported a substantially stronger third quarter, with record revenue and higher margins despite a sharp increase in fuel expense. Operating revenue reached $8.42 billion, up 21.2% year over year. Reported net income was $270 million, or $0.55 per diluted share, while adjusted net income totaled $328 million, or $0.66 per share. Adjusted operating margin rose 4.8 percentage points to 5.4%. Management described the quarter as evidence that its commercial transformation is “generating more durable earnings.” Strong revenue results support this thesis as current pricing and demand trends show no signs of slowing down.

Revenue, Network, and Operational Performance

RASM increased 21.6%, exceeding the Company’s 17.5% to 19.5% guidance range, even as available seat miles declined 0.4%. Passenger revenue increased 22.8%, and average passenger fare climbed 26.9% to $231.69. Load factor was unchanged at 79.8%, while revenue passengers carried declined 3.2%. These results suggest the quarter’s revenue improvement was driven predominantly by stronger fares and product monetization rather than increased traffic growth. Particularly strong September demand, higher-than-anticipated fares and volumes, and continued improvement in managed business travel were also cited as contributing factors. Twenty of the Company’s 50 highest corporate booking days occurred during the quarter. Southwest continues to concentrate flying in stronger markets, including Nashville, Las Vegas, Orlando, Austin and San Diego, while refining connecting banks, expanding red-eye service, and adding airline partnerships. Executive Vice President and Chief Commercial Officer Justin Jones also pointed to assigned seating, extra-legroom products, dynamic pricing, and improved business distribution as contributors to revenue performance. TAP Air Portugal and LOT Polish Airlines became the Company’s 10th and 11th airline partners.

Expenses and Costs

Total operating expenses increased 16.3% to $8.04 billion, substantially below the 21.2% growth in revenue. Nevertheless, fuel remained a major headwind: The average fuel price rose to $3.92 per gallon, and fuel expense increased $821 million from the prior year. CASM-ex increased 3.8%, within guidance. Salaries, wages, and benefits increased 10.0% to $3.54 billion. Management also highlighted the contribution of aircraft disposition gains to its cost performance. Third-quarter gains totaled $214 million, including $96 million associated primarily with retiring aircraft and engine sales and $118 million from sale-leaseback transactions. Those gains support reported earnings but should be considered separate from improvements in the base cost of operating flights. The Company has also revised salvage-value assumptions for portions of its fleet, which management expects to reduce depreciation expense by somewhat more than 10%. This will better reflect anticipated values for aircraft at the “end of its useful life,” according to Executive Vice President and Chief Financial Officer Tom Doxey.

Fleet, Liquidity, and Capital Deployment

Southwest accepted 20 MAX-8 aircraft and retired 20 aircraft during the quarter, ending September with 803 aircraft. The retirements included 17 -700s and sales of three -800s. For full-year 2026, management expects approximately 67 MAX-8 and MAX-7 deliveries and 60 retirements, with net capital spending of $2.5 billion to $2.75 billion. During the call, Doxey said MAX-7 certification had been achieved and suggested 2027 factory deliveries could exceed 2026 levels; previously built MAX-7s are expected to begin arriving late this year and enter service in 2027. Liquidity at quarter-end totaled $5.6 billion, including $3.6 billion of cash and a $2 billion revolving credit facility, and gross leverage was 1.9 times. Southwest paid $176 million in dividends. The Company also noted that they anticipate total gains on sales of retiring aircraft and sale-leasebacks to be “broadly similar to those in the first and second quarter of this year.”

Looking Ahead

For the fourth quarter, Southwest forecasts RASM growth of 19% to 21% on capacity growth of 3% to 4%, with CASM-X rising 4.0% to 4.5%. Management identified the removal of six seats from -700 aircraft for extra-legroom seating as an approximately one-percentage-point CASM-X headwind. The Company projects fourth quarter adjusted EPS of $0.55 to $0.80, based on an assumed fuel price of approximately $4.55 per gallon, and full-year adjusted EPS of $2.60 to $2.85. Doxey said he expects the higher fourth-quarter unit-cost growth to moderate in 2027, but cited heavy maintenance timing, frontline labor and health-care costs, operational performance, and additional advertising spending as near-term pressures. Southwest is simultaneously expanding its premium and loyalty strategy: a new Rapid Rewards Platinum tier, new redemption options, a premium co-brand credit card, and the first Southwest Icon Lounges are planned for 2027. Lounges are under construction at AUS, BWI, HNL, and BNA, with at least seven additional locations possible. The Company expects fleetwide Starlink installation by fall 2027. The March 2, 2027, Capital Markets Day should provide a more detailed multiyear financial and product framework.

 

Next Earnings Report: Q4 Earnings Call, January 28, 2027, at 10 am ET/9 am CT

Sources: LUV Press Release, Other Airline Press Releases, LUV Earnings Call Transcripts, SWAPA calculations.

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 cost 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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